If Treasury forecasts are right, it could be a decade before Australia is ‘back in black’

After two successive surpluses, the federal budget will be back in deficit in 2024–25, according to the much-anticipated budget update released on Wednesday.

Known as the Mid-Year Economic and Fiscal Outlook^[1] (MYEFO), the update shows the budget is forecast to stay in deficit in years to come.

The MYEFO is a little more downbeat than at budget time with lower growth and wage forecasts in the current financial year, but only by a quarter of one percent.

Overall, there has been little change in the economic forecasts. There is new spending, which increases deficits in the forward years, but again, this is small in percentage terms.

The path back to surpluses by 2034-35 remains much the same as previously forecast.

Heading back to the red

This year’s deficit was budgeted at A$28.3 billion (1% of gross domestic product) in the budget handed down in May. Treasury now expects the deficit to be $26.9 billion, a small decrease.

The deficit is forecast to increase further next year to $46.9 billion, compared with $42.8 billion forecast in the budget.

Treasury now expects $8.5 billion less company tax to be collected over the four years to 2027-28 than it thought at budget time. This is because it now expects mining exports to be more than $100 billion weaker than forecast.

The price of iron ore has fallen since the beginning of 2024 as the Chinese economy has slowed. China has long been Australia’s biggest importer^[2] of iron ore by a huge margin.

The falling price contrasts with most recent years when commodity prices turned out to be higher than Treasury’s cautious budget assumptions.

Treasurer Jim Chalmers had foreshadowed this impact in his recent ministerial statement^[3] on the economy and at a press conference on Monday^[4].

Read more: More spending and weaker revenue hits budget bottom line in some years: Chalmers^[5]

Government spending this year is now forecast to be $731.1 billion, $4.4 billion higher than in the budget. Numerous new payment measures in Wednesday’s statement including childcare, aged care, a remote employment service, and a raft of smaller initiatives.

Early childhood education is one of the highlighted areas. The government is investing $5 billion over five years – the biggest component of which is $3.6 billion for wage increases.

The government had foreshadowed an extra $1.8 billion in payments to veterans, and more spending on recovery funding for areas affected by disasters. But the budget update’s numbers could come unstuck depending on the nature of any future disasters.

The update includes a reconciliation table showing how much change since the last update is due to policy decisions and how much to “parameter variations”, that is, things outside government control.

In most updates, policy is outweighed by parameter changes. That is true for receipts in this economic outlook, but on payments the impact of policy is higher than parameters in 2024-25 and 2025-26.

The government’s critics have pointed out^[6], in nominal dollar terms, this $42.7 billion deterioration from last year’s surplus to this year’s deficit, is the largest outside the COVID-affected years of 2019-20 and 2020-21.

Read more: Deloitte predicts December budget update will show bottom line has worsened since May, in fiscal 'thud'^[7]

But inflation and economic growth mean almost everything is larger now than it once was. A more meaningful comparison is to look at movements in the underlying cash balance relative to GDP.

A swing from a balance of 0.6% of GDP in 2023-24 to -1.0% in 2024-25 represents a drop of 1.6% of GDP. This would still be a smaller deterioration than occurred in 1975-76, 1982-83, 1991-92, 2008-09, 2009-10, 2013-14, 2019-20 and 2020-21 and comparable to those in 1983-84 and 1990-91.

It is nowhere as exceptional as some breathless commentary^[8] suggests.

A pre-election war chest

The mid-year outlook includes payments of $218.6 million in 2024-25 and $828.1 million in 2025-26 for “decisions taken but not yet announced”.

Read more: $16 billion of the MYEFO budget update is 'decisions taken but not yet announced'. Why budget for the unannounced?^[9]

This provision allows ministers to make new policy announcements after a budget or budget update without affecting the bottom line, because monies have already been allocated.

It’s incorrect to claim these are “already paid for”. These figures are merely estimates and future spending still needs authorisation.

It is reasonable for some spending decisions included in the contingency reserve not to be published for national security or commercial reasons. More troubling for honesty in budgeting is the use of this for political reasons.

Effectively, it means the government is holding off making announcements to maximise their political impact. Better practice, if a decision has been made, is to make it public.

There is no way to tell how much of the $828 million next year is commercial or security decisions, and how much is unannounced promises to be rolled out during the election campaign.

Economic activity outlook

Treasury has also updated the economic growth forecasts from the budget.

Real gross domestic product is now expected to grow by 1¾% (down from 2% in the May budget) this year and 2¼% (unchanged) next year. Donald Trump’s election in the United States will have created more uncertainty around these forecasts.

Read more: What would a second Trump presidency mean for the global economy?^[10]

Inflation and interest rates

Inflation is forecast by Treasury to fall to 2¾% by mid-2025, and then stay within the Reserve Bank’s 2-3% inflation target band^[11].

But much of the fall in inflation is due to temporary measures such as the electricity rebates, so there is a risk of inflation rising when these expire.

Will there be a budget before the election?

The government’s current parliamentary sitting program^[12] has a budget scheduled for March 25, 2025. This would be consistent with an election in May^[13].

But the government is keeping open the option of calling an election for April and deferring the budget until after.

Either way, there will be a further budget update before we go to the polls. Treasury and the Department of Finance are required to release a Pre-election Economic and Fiscal Outlook^[14] after an election is called.

References

1. ^{^} Mid-Year Economic and Fiscal Outlook (budget.gov.au)
2. ^{^} biggest importer (theconversation.com)
3. ^{^} ministerial statement (ministers.treasury.gov.au)
4. ^{^} press conference on Monday (ministers.treasury.gov.au)
5. ^{^} More spending and weaker revenue hits budget bottom line in some years: Chalmers (theconversation.com)
6. ^{^} pointed out (www.afr.com)
7. ^{^} Deloitte predicts December budget update will show bottom line has worsened since May, in fiscal 'thud' (theconversation.com)
8. ^{^} breathless commentary (www.afr.com)
9. ^{^} $16 billion of the MYEFO budget update is 'decisions taken but not yet announced'. Why budget for the unannounced? (theconversation.com)
10. ^{^} What would a second Trump presidency mean for the global economy? (theconversation.com)
11. ^{^} 2-3% inflation target band (www.rba.gov.au)
12. ^{^} sitting program (www.pmc.gov.au)
13. ^{^} election in May (antonygreen.com.au)
14. ^{^} Pre-election Economic and Fiscal Outlook (treasury.gov.au)