Australia’s federal budget is on track for a wafer-thin $1.1bn deficit this year, with a strong labour market and commodity prices fuelling expectations the eventual result will be a second Labor surplus.
The mid-year economic and fiscal outlook, released on Wednesday, revealed a $12.8bn improvement for the 2023-24 financial year compared with the May budget and a total of $39.5bn more in federal coffers over the four years to 2026-27.
The Albanese government has resisted calls to offer more assistance to households, pointing to existing measures including energy bill relief and cheaper childcare and gambling that saving improvements in revenue will benefit voters more in the long run by putting downward pressure on inflation.
The treasurer, Jim Chalmers, told reporters in Canberra that treasury is “not yet forecasting a second surplus” but the federal budget was “within striking distance” and the government had “given ourselves a chance”.
The mid-year update predicts a “slowing” economy in 2023-24 with GDP growth falling to 1.75% due to “higher interest rates, high but moderating inflation and global pressures”.
The Australian economy is then expected to grow by 2.25% in 2024-25 “as inflation subsides following its peak in 2022 and household disposable incomes improve”.
The government says it has identified $9.8bn in “savings and reprioritisations” in this Myefo, the majority of which is $7.4bn cut from infrastructure over the next four years, and a total of $72.7bn since coming to office.
But the Myefo also contains new revenue-raising measures, including $349m from increasing passport fees by 15%, $500m from denying interest charged by the tax office being claimed as a tax deduction and $155m from the luxury car tax by tightening the definition of fuel-efficient vehicles.
“While inflation is still too high, it is continuing to moderate and real wages are beginning to grow,” the Myefo said, with annual wage growth set to outpace inflation in early 2024.
Inflation is projected to be 3.75% in 2023-24 and to fall to 2.75% in the June quarter 2025, a return to the Reserve Bank’s target range of 2-3% which should signal the end of the cycle of 13 interest rate rises since May 2022.
Chalmers acknowledged there was a “small uptick” in inflation in the near term, which he attributed to volatility in oil prices, but “no material change” to when it would be back within the target band.
After the “unemployment rate … recorded its longest consecutive run below 4% since monthly records began” the Myefo projects it will rise “modestly” to 4.25% this financial year and 4.5% for the next two years.
In May Chalmers handed down the first surplus in 15 years, later revised up to a surplus of $22.1bn.
Despite the projected $1.1bn deficit – 0.0% of GDP – banks such as the CBA expect the eventual result will be close to a $20bn surplus. The independent economist Chris Richardson has suggested the government’s aim is to “calm the horses” to maintain fiscal discipline in its ranks by holding off on projecting a surplus.
The Myefo revealed that “tax receipts have been revised up by $64.4bn over four years to 2026–27, primarily reflecting near-term strength in commodity prices, higher non-mining corporate profits and recent strong employment growth”.
It projects that debt as a share of GDP is now expected to peak 1.1 % lower than forecast at the 2023–24 budget at 35.4% of GDP in 2027–28.
Chalmers has come under pressure from the Labor backbench to do more to support households, but policy decisions in the Myefo add just a net $5.3bn in spending. The government says it has banked 92% of revenue improvements since the May budget.
The government’s existing cost-of-living measures “are expected to directly reduce annual headline inflation by [0.75%] through the year to the June quarter 2024”, the Myefo said.
The Myefo warns that the “global economic outlook remains highly uncertain”, with growth expected to slow for two years due to “persistent inflation and higher interest rates”.
“Russia’s invasion of Ukraine, the Hamas-Israel conflict, the ongoing adjustment in China’s property sector and the lagged effects of sharp global monetary tightening all pose downside risks,” it said.
Among the biggest new spending measures are: $575.5m over 11 years to implement the Aukus nuclear submarine acquisition, $300m over five years for cybersecurity, $186.6m for assistance to Ukraine over two years, and $285m to buy 78 Bushmasters to replace those given to Ukraine to be funded “within the existing resourcing” of defence.
Labor’s commitment to increase the humanitarian visa intake from 17,875 to 20,000 places will cost a net $586.5m, the Myefo reveals. The government will also spend an extra $511.3m over two years on the National Disability Insurance Scheme.
Chalmers and the finance minister, Katy Gallagher, said the Myefo is “all about responsible economic management because that’s the best way to put downward pressure on inflation and ease cost-of-living pressures”.
“We will avoid $145bn over 12 years to 2033-34 in interest costs on the debt we inherited, as a result of banking the vast majority of upgrades to revenue,” they said.
“Through our spending restraint and by returning the vast majority of revenue upgrades to the budget, our fiscal strategy is working alongside monetary policy to reduce inflationary pressures in the economy.”
The shadow treasurer, Angus Taylor, said Labor had “ignored” the household budget but declined to call for further cost of living relief, arguing instead the government’s priority should be to “get inflation down”.
The shadow finance minister, Jane Hume, said it would be a “very tough Christmas” for many families because of the government’s “high tax, high spend” budget.
