Soaring commodity prices and a strong labour market will deliver a $42bn boost to the budget bottom line over the next four years, with the deficit more than halving this financial year.
However, the improvement – to be revealed in Jim Chalmers’ first budget on Tuesday night – will be short-lived, with worse-than-expected deficits by the end of the forward estimates as a result of growing spending pressures.
Riding a tax revenue boom of more than $100bn, the underlying cash balance for 2022-23 is now forecast to be a $36.9bn deficit – less than half the $78bn deficit predicted in March.
Across the forward estimates, the budget bottom line will be $42bn better than previously forecast, but the improvement will be concentrated over the next two years before conditions again deteriorate.
This means that deficits will be worse in the out years than previously forecast as a result of “substantially higher” spending than forecast on the cost of debt, healthcare, aged care and the National Disability Insurance Scheme (NDIS).
The temporary boost comes on top of a $48bn improvement in the deficit for 2021-22, which was revised down to $32bn from $79.8bn in last month’s final budget outcome.
Chalmers said that the improved deficit was the result of the government banking most of the revenue gains, saying a responsible budget was the best defence in “times of extreme global volatility and uncertainty”.
“Our responsible approach to revenue upgrades means the budget bottom line will be more than $40bn better over the forward estimates in aggregate, and debt will be lower than previously forecast,” he said in a statement ahead of Tuesday’s budget.
“The primary influence on this budget is inflation. We are putting a premium on restraint and resilience because that’s what the times call for.”
Gross debt, which was forecast in March to peak at $1.17tn in 2025-26, is also expected to be revised down in the budget, with the figure to be lower every year over the forward estimates.
“That’s less debt than the Liberals but there’ll be more to show for it,” Chalmers said.
“We’ve been left with a trillion dollars of debt and a budget deep in structural deficit, but hard decisions mean we can still deliver our commitments, keep spending under control, and start down the long road of budget repair.”
Tuesday’s budget will include downgrades to domestic and international economic growth and an uptick in inflation, with wages not expected to outpace the cost of living until 2024.
More than $10bn in savings will be delivered as a result of the government’s waste and rorts audit that will scrap a number of projects promised by the former Coalition government.
Chalmers has been framing the budget as a “solid, simple and sensible” blueprint for uncertain economic times, pushing back against calls for more spending and immediate cost-of-living relief for families in Australia’s high-inflation environment.
The budget will reveal the cost of interest payments on government debt is set to grow at about 14% a year on average over the next four years, with defence spending to grow 4.4% annually, hospitals 6.1% and aged care 5%.
The NDIS will cost an extra $8.8bn a year, growing 12.1% annually, with the program now forecast to cost more than $50bn a year by 2025-26.
The government has, for now, ruled out clawing back any of the stage-three tax cuts that are worth $254bn over the decade and has confined its commitment to tax reform to a crackdown on multinational corporations.
But Chalmers has left open the possibility of future tax reform following a “national conversation” about the fiscal challenges ahead.
“We are a good chance of a really important and productive national conversation about how we spend and invest on the things that our society values most,” he said last week. “October was always intended to be the beginning of that conversation and not the end.”
