The federal budget will swing to sizable deficits from the coming financial year as government spending picks up, a switch that the treasurer, Jim Chalmers, hopes will not stoke inflationary pressures in the economy.
The budget will post a forecast surplus in the current year of $9.3bn – equivalent to 0.3% of gross domestic product – making it the first back-to-back surplus since 2007-08. The ledger, though, will slip sharply into a deficit of $28.3bn (1% of GDP) and further into the red at $42.8bn (1.5% of GDP) the following year.
Those shortfalls were higher than the projected deficits of $18.8bn and $35.1bn for those two years in the midyear economic and fiscal outlook, which was released last December.
Public demand is underpinning GDP growth of 1.75% this year and 2% for the 2024-25 year. This component, which includes spending by state governments, will grow 4.5% this year and 1.5% next year, or more than the 2.5% and 0.75% projected by Myefo.
Household demand, squeezed by higher interest repayments and tax payments, will barely grow this year at just 0.25%, or half the meagre pace which the Myefo forecast. It should, however, begin to pick up in 2024-25, quickening to 2% and then 2.75% in the following year as wages continue to grow faster than consumer prices, Treasury forecasts show.
Despite the fiscal spending pulse in the economy, Chalmers said in this budget speech that the Treasury now expects inflation could return to the Reserve Bank’s target of 2% to 3% “perhaps even by the end of this year”.
Pre-budget figures released point to a discrepancy between the Treasury’s and the RBA’s latest forecasts, with the central bank expecting consumer price inflation to be 3.8% by December and retreating to 2.8% by a year later.
The cash rate is assumed to gradually ease from around the middle of 2025 to reach 3.6% “by the middle of 2026”, the budget stated. On this assumption, the cash rate of 4.35% would only have three cuts over the next two years, implying only limited relief for stretched borrowers.
Chalmers told Guardian Australia that the $3.5bn energy rebates and $1.9bn increase in commonwealth rent assistance would help ease inflation. “The advice is really clear: there’s not an expectation that it will add to broader inflationary pressures and will bring those two bills down,” he said.
The Treasury secretary, Steven Kennedy, said money saved on energy or rent would not just be spent elsewhere. As headline inflation would be mechanically lowered by the extra support, other payments based on CPI would also be reduced, taking demand out of the economy.
As for the additional demand pulse from government, Chalmers said net spending decisions in the budget amounted to about $25bn. “Two-thirds of it is stuff that any reasonable person would consider to be unavoidable,” he said, listing palliative care and cancer support that would otherwise have run out.
Before Tuesday’s budget, the median forecast by economists was for a budget deficit of $14bn for the coming year and $25bn for the year after. Pat Bustamante, a senior economist at Westpac – who accurately predicted the current year surplus (estimating it would be $9.37bn) – had tipped the coming year shortfall to be $10.1bn and $36.4bn for 2025-26.
As with previous budgets, the Treasury applied conservative estimates for commodity prices that could reduce the size of coming deficits.
The iron ore price, which this week traded at about US$119 a tonne, is supposed to sink back to its long-run average of US$60/t. Similarly, metallurgical coal used in steelmaking is assumed to decline to US$140/t compared with the US$250/t it was trading at this week; thermal coal used in power stations was also assumed to decline to US$70/t, or well below its current level of about US$107/t.
As in previous years, the budget’s underlying cash balance does not represent all of the government’s spending activities. So-called off balance sheet spending – known in the budget as the total net cashflows from investments in financial assets for policy purposes – also swells in coming years, partly as a result of projects related to the Future Made In Australia package.
In the budget for the 2023-24 year, the total for this figure for the four years between 2022-23 and 2026-27 was $59.6bn. That included $14.12bn for the 2024-25 year and $15.215bn for 2025-26.
In the 2024-25 budget, however, the tally for the four years to 2027-28 has the net cashflows increasing to $80.53bn. For the 2024-25 year alone, the outlays rise by almost $5bn to $18.92bn, and by about $5.7bn in the 2025-26 year. For the 2026-27 year, the increase in this tally is about $7.25bn to $20.13bn compared with last year’s budget.
The $15bn National Reconstruction Fund is expected to have $524m in loans and investments in the 2024-25 year, with the tally of approvals rising to $3.05bn in the 2027-28 year. The Clean Energy Finance Corp, another key vehicle to promote renewables and other low-carbon investments, will see loans and investments almost triple from this year to next year’s total of about $2.37bn before topping $5bn in each of the following three years.
Snowy Hydro, which is building the $12bn-plus Snowy 2 pumped hydro project, will be granted loans of $1.45bn in each of the three years between 2025-26 and 2027-28.
Other notable changes from Myefo include population growth. In the 2023-24 year, net migration will be 395,000, or 20,000 more than forecast last December, presumably adding extra demand in the economy. For the coming year, net migration will ease to 260,000 or 10,000 more than Myefo.
Two areas of improvement in the budget compared with Myefo came in the growth of major payments for interest on debt and the NDIS. At the end of last year, interest payments were expected to be growing at an annual average of 11.7% for the period from 2023-24 out to 2033-34. That forecast growth pace has been pared back to 9.9% for the decade from 2024-25.
NDIS payments had been expected to rise 10.1% for the decade from 2023-24, a pace that has been trimmed to 9.2% a year for the 10 years to 2034-35. That reduction “encompasses an additional year of moderation in scheme growth”, the budget said.
