Australia’s finances have been downgraded by $21.8 billion as rising spending and plunging tax receipts set up a decade of budget deficits.
The degraded fiscal bottom line was laid bare in Wednesday’s mid-year economic and fiscal outlook, which updates the forecasts made in May’s federal budget.
The expected deficit for the current financial year – 2024/25 – improved by $1.4 billion to $26.9 billion.
However, the underlying cash balance is set to worsen in the following three years, leading to a wider deficit of $31.7 billion in 2027/28 and gross debt to be $49 billion larger than was forecast in the budget.
The budget is not expected to be back in the black until 2034/35.
The return to red ink in the government books follows two straight surpluses of $22 billion and $16 billion in 2022/23 and 2023/24, respectively.
Treasurer Jim Chalmers said the government’s economic strategy has struck the right balances.
“Despite all of the pressures in our budget, we are on track for a soft landing in our economy,” he told reporters.
“We’ve maintained a primary focus on inflation and the cost of living, without ignoring our broader responsibilities to people when it comes to Medicare and medicines and pensions and the like, and also without ignoring the very substantial risks to growth.”
Spending is set to increase by $25 billion from the May budget forecast, including $16.3 billion in “automatic” increases like pension indexation and $8.8 billion on “unavoidable” increases, including the extension of measures such as aged care programs that were facing funding cliffs.
Off-budget spending has ballooned to almost $90 billion. This includes assets the government buys that supposedly retain their value, including investments in submarines and student loans, and has been criticised by economists as a way to squirrel away extra spending.
The government has previously been able to bank on revenue upgrades, mainly due to tax boosts from strong minerals demand from China, to pay for ballooning spending.
Wednesday’s update ends a string of huge upward revisions on tax receipts across the last four mid-year outlooks – known as MYEFO – that averaged $80 billion.
Successive governments have ignored a worsening structural deficit, relying on serendipitous commodity price booms to paper over the fiscal cracks, Deloitte Access Economics partner Stephen Smith noted.
“Today’s very weak private sector economy has revealed the extent of the issue, which would be worse but for Australia’s strong labour market and rapid population growth,” he said.
Company tax receipts have been downgraded by $8.5 billion over the four-year budget cycle in the first negative revision since 2020/21, largely down to China’s sluggish growth prospects.
The Labor government has offset some growth in spending by finding $14.6 billion in savings or “reprioritised” funds.
Shadow treasurer Angus Taylor said Australians would pay the price of Labor’s big-spending, big-taxing government.
“This is the biggest spending government we have seen out of outside of wartime or crisis and there is absolutely no pathway in this update to a restoration of Australians’ standard of living,” he said.
The update also provides $5.5 billion for decisions taken but not yet announced, which can be used by the government as a “war chest” ahead of the next election, due by May 17.
Dr Chalmers said the figure was relatively small by historical standards.
Workers are set to see their pay packets grow at a slower rate than was predicted in May.
Wages growth forecasts have been downgraded a quarter of a percentage point to three per cent in 2024/25, before accelerating to 3.5 per cent by 2027/28.
The economy is meanwhile set to grow 0.25 percentage points slower in the current 2024/25 financial year than previously forecast, at 1.75 per cent.
Net overseas migration estimates were revised up from 260,000 to 340,000 for 2024/25, due to slower-than-expected departures.
