Decade of deficits looms amid ‘unavoidable’ spending

Australia faces a decade of deficits, with the sum of deficits over the next four years expected to overshoot forecasts by $21.8 billion.

This year’s deficit has been revised down slightly to $26.9 billion, but the deficits in each of the next three years will be some $21.8 billion larger than forecast earlier this year, Treasurer Jim Chalmers said on Wednesday.

The Treasurer said that the combined deficit over the next four years is estimated at $143.9 billion.

Treasurer Chalmers also noted that the government made $14.6 billion in savings.

New spending, however, climbed to $8.8 billion, with the Treasurer referring to this as “unavoidable” because it funded services and programs that the Australian people rely on.

Namely, extra spending went on an extension of COVID-19-era health initiatives, aged care programs, infrastructure projects, and domestic violence funding.

“This mid‑year update includes $8.8 billion in unavoidable spending, taking the total since coming to government to $47.6 billion,” Treasurer Chalmers said.

“We’ve also had to account for $16.3 billion in payment variations to ensure veterans receive their entitlements, to index pensions, to increase support to families, to support disaster recovery and support increased demand for health services.”

But despite these “slippages”, the Treasurer said the government is doing a good job of managing the economy.

“We’ve managed to get the deficit for this year a little bit smaller as well, but much smaller there was anticipated a couple of years ago,” Treasurer Chalmers said.

“We’ve made room for pressures and for priorities with all of the savings that we’ve made, $92 billion of them by banking revenue, by showing spending restraint.”

Key fiscal achievements highlighted by Treasurer Chalmers include a $27.1 billion improvement in the budget position over four years to 2027–28 compared with pre-election projections (PEFO), a $200 billion better fiscal outlook over six years compared with PEFO, and a forecast for gross debt to peak at 36.7 per cent of GDP, 8.2 percentage points lower than previous projections.

“Despite the pressures coming at us, we’re on track for a soft landing and our budget strategy is helping,” Treasurer Chalmers said.

“Our economy is growing, inflation is moderating, real wages are growing, unemployment is low, more than 1 million new jobs have been created, we’re rolling out tax cuts and cost‑of‑living help to help people doing it tough, and there’s now much less debt than when we came to office.”

While Treasurer Chalmers said there is more work to do, he emphasised that this update underscores the government’s commitment to repairing the budget and building a more resilient economy.

“We’ll continue to put a premium on responsible economic management with a focus on fighting inflation without ignoring risks to growth, repairing the budget, rolling out responsible cost‑of‑living relief and building a stronger economy into the future,” he said.

Also speaking on Wednesday, Finance Minister, Katy Gallagher, said: “While the budget position is $1.3 billion better off than forecast at budget, the slippage across the forward estimates is really down to urgent, unavoidable or automatic spending.

“Unavoidable spending is half of those decisions in MYEFO.”

Good luck running out

According to AMP’s Shane Oliver, while the worsening budget deficit outlook – the $21.8 billion deterioration over four years to 2027–28 – is partly driven by increased spending on veterans, disaster relief, Medicare, and childcare, it is also due to new policy measures, including election-related funding.

“The main driver of the deterioration has been new policy stimulus of $2.1 billion this financial year and a total of $17.5 billion out to 2027–28,” Oliver said.

“The new policy stimulus includes more spending on childcare with a move towards universal childcare, aged care and school funding and $5.6 billion over four years on ‘decisions taken but not yet announced’, which are basically election goodies to be announced ahead of next year’s election.”

The chief economist said that the “good luck” flowing from extra revenue on the back of the strong jobs market and higher-than-expected commodity prices that combined to push the budget into surplus over the last two years is now “fading in the rear view mirror”.

“Instead the budget is now being exposed to big spending pressures made worse by policy decisions that keep adding to spending,” Oliver said.

“The problem for the economy is that it means continued strong growth in public spending, which adds to demand in the economy and the swing from a surplus to a deficit this financial year implies around $42 billion of stimulus or 1.6 per cent of GDP being pumped into the economy.”

All of this, Oliver said, “makes the RBA’s job in getting inflation down unnecessarily harder and puts more pressure on the private sector – particularly Australian households – to keep a lid on their spending”.

“In other words, it runs the risk of higher interest rates than would otherwise be the case. Fortunately most of the new policy stimulus in the MYEFO impacts from 2025–26, by which time inflation should be lower,” he said.

“We continue to see lower underlying inflation and soft growth enabling the RBA to start cutting rates in the first half next year – hopefully in February but if not then by May – and to cut them at least three times next year. But were it not for all the extra spending and fiscal stimulus they could have been cutting earlier and by more.”

Moreover, Oliver said a growing concern is the widening gap between the underlying cash balance, which excludes “off-budget” investments like the NBN and housing initiatives and the headline cash balance, which accounts for all net cash flows, raising questions about budget transparency as these investments drive up federal debt and may face future write-downs.