The Australian Federal Budget for 2024/25 was handed down by the treasurer in Canberra this evening. The sizeable revenue upgrades that have driven the budget into surplus for two years in succession are moderating as pressures on governments at the federal and state levels to deliver key services and infrastructure are driving up the outlook for spending. In the short term, the government has prioritised delivering cost-of-living support, set to provide around $9.5bn of stimulus in 2024/25.
Budget 2024/25 | Fiscal Position
Although Australia will post a second consecutive budget surplus in 2023/24, larger deficits are now expected in the coming years. Following a $22.1bn surplus in 2022/23, a $9.3bn surplus is forecast for the current financial year - upgraded from a $1.1bn deficit anticipated in the Mid-Year update (MYEFO) published last December. As the chart below shows, so-called cyclical factors have swung the budget into surplus over the past couple of years. Resilient economic conditions; very low unemployment; and elevated commodity prices are key factors that have contributed to delivering a revenue windfall to the government.
This has put Australia in an unusual position among peer economies in running twin surpluses; the current account has been in surplus for an extended period that now dates back to mid-2019.
However, with the economy slowing, commodity prices set to retrace and structural pressures on the nation's finances intensifying, the budget is expected to fall back into deficit in 2024/25 (-$28.3bn) and remain in the red through the forward estimates. These structural pressures on the Budget were identified in the 2023 Intergenerational Report and include spending associated with climate change, an ageing population, regional security and the increased demand for care and support services. Cumulatively, deficits to 2026/27 are now forecast to run to $88.5bn, a deterioration from the $74.6bn in deficits anticipated in MYEFO.
The deterioration comes about due to revenue windfalls moderating alongside rising government spending. Government receipts are now expected to peak at 25.8% of GDP this financial year (up from 25.6% in MYEFO) but to then slow to 25.1% of GDP by 2026/27. By contrast, government payments - although revised down to 25.4% of GDP in 2023/24 from 25.7% in MYEFO - have increased across the forward estimates to a peak of 26.6% of GDP in 2025/26.
As a result of the deterioration to the fiscal outlook, the profile for net debt has also worsened relative to the forecasts in the MYEFO. From 18.6% of GDP in 2023/24 (18.4% previously), net debt grinds higher to 21.8% of GDP in 2026/27 (up from 20.8%).
Budget 2024/25 | Policy Measures
New policy measures announced in the Budget are framed around providing support for the cost of living (including the stage 3 tax cuts) as well as in other areas such as defence and aged care and for the government's initiative to revive local manufacturing to assist with the net zero transition. The net cost of these measures is substantial - $9.5bn in 2024/25 for a total of $23.2bn to 2026/27. Major items include: national defence ($5.7bn over 4 years), energy bill relief ($300 rebates to every household, total cost $3.5bn over 3 years); new Pharmaceutical Benefits Scheme listings ($3.4bn over 5 years); road and rail infrastructure ($2.9bn over 5 years); Future Made in Australia initiative ($2.6bn over 5 years); aged care ($2.2bn over 5 years); Commonwealth rent assistance ($1.9bn over 5 years); Stage 3 tax cuts ($1.3bn over 5 years).
Budget 2024/25 | Economic Outlook
The evolution in Treasury's economic forecasts since the 2023/24 Budget is presented in the table below. Alongside a slowing global economy, the outlook for domestic growth has been revised lower. This results in softer employment growth over the next couple of years; however, the path for the unemployment rate is little changed - signalling a soft landing scenario remains the central view. A retracement in commodity prices sees the terms of trade fall but at a slower pace than earlier forecast.
The major point of contention in this budget is around the inflation outlook. As a result of the government's energy bill relief and rent assistance, Treasury forecasts inflation could be back inside the RBA's 2-3% target band by the end of the year, with these measures expected to deduct around 0.5ppt from headline CPI in 2024/25. This is a faster timeline than forecast by the RBA (second half of 2025) and is contentious in the sense that these measures could free up households to boost spending in other areas.
