In Canberra today, Treasurer Chalmers presented the mid-year update of the federal budget for 2024/25 handed down in May. MYEFO revealed a near $22bn deterioration in forecast deficits across the forward estimates, driven by an outlook for increased government spending - partly due to structural pressures on the budget and new policy decisions. Wider deficits drive increased government debt, but public demand is set to remain a key support for growth in the Australian economy.
MYEFO 2024/25 | Fiscal Position
After consecutive budget surpluses in 2022/23 ($22.1bn) and 2023/24 ($15.8bn), the federal budget tabled in May forecast that Australia's fiscal position would deteriorate over the coming years. Today's mid-year update reported that the scale of that expected deterioration has increased.
Although the deficit projected for the current financial year (2024/25) has narrowed from $28.3bn to $26.9bn, larger deficits are now anticipated across the forward estimates: $46.9bn in 2025/26 (from $42.8bn); $38.4bn in 2026/27 (from $26.7bn); and $31.7bn (from $24.3bn). Cumulatively, deficits are expected to run to $143.9bn over the next 4 years, widening from $122.2bn forecast in May's budget.
This represents a stark turnaround. Australia ran sizeable surpluses coming out of the pandemic in 2022/23 and 2023/24 as the dynamics all turned in favour of increasing government revenues; economic growth rebounded sharply, reopened borders saw population growth surge, commodity prices hit elevated levels, and wages growth and inflation accelerated as the labour market tightened. But with those tailwinds now dissipating, the outlook is for the budget to be left exposed to structural pressures. Last year's Intergenerational Report identified 5 major structural pressures on the budget: health, aged care, NDIS, defence and debt interest.
MYEFO 2024/25 | Overview
The key movements in the budget balances in MYEFO compared to the May budget are illustrated in the chart below.
In the current financial year, the forecast deficit has narrowed from $28.3bn in May to $26.9bn in MYEFO, with parameter changes the driving factor. Effectively, stronger-than-expected economic conditions are set to generate a larger tax-take for the government than forecast in May, marked up by $2.8bn. Resilient labour market conditions boost taxes from individuals by $8.9bn, while taxes from super funds are $2.1bn higher. However, company taxes have been lowered by $6.6bn since May - their first downgrade since 2020/21 - due to lower commodity prices hitting mining sector profits.
In the out-years, the key dynamic is government spending (or payments) rising more quickly than government revenues (or receipts). This leads to wider deficits than forecast in the May budget.
Forecast government revenue was actually upgraded each year - but on a slowing trajectory - by $9.1bn in 2025/26, $3.4bn in 2026/27, and $2.3bn in 2027/28; however, those upgrades are outweighed by forecasts for uplifts in government spending of $13.1bn in 2025/26, $15bn in 2026/27 and $9.6bn in 2027/28.
Policy decisions taken since May and included in today's MYEFO cost the budget $19.1bn over the next 4 years. The new initiatives include: wage increases in the early education sector ($3.6bn); expanded Pharmaceuticals Benefits Scheme listings ($2.5bn over 5 years); NDIS funding ($0.9bn); improved child care access ($0.8bn); renewable energy ($0.8bn); and road and rail infrastructure ($0.7bn).
Another policy decision of note is the government's plan to reduce student loans by 20% at a cost of $20bn over 4 years; however, that item has been treated as an 'off-budget' measure that hits the headline rather than the underlying cash balance.
Meanwhile, increased demand for government programs including in aged care, child care and disability support services, as well as higher debt servicing costs see parameter variations pushing up government spending by $23bn over the next 4 years.
As a result of widening budget deficits, government borrowings will increase. Net debt is projected to rise from 19.6% of GDP this financial year to 22.4% by 2027/28, an increase in nominal terms of around $170bn over the period.
MYEFO 2024/25 | Economic outlook
Treasury's economic outlook for global growth has remained broadly unchanged since MYEFO, with the risks 'tilted to the downside'. The main headwind to Australia from offshore is moderating growth in the Chinese economy, which weighs on the outlook for commodity prices - reflected in a weaker terms of trade and slower nominal GDP growth (see domestic forecast table). Treasury noted that if its outlook for growth in China materialises, this would be the slowest 3-year period of growth there since the 1970s; however, the effect of recent stimulus announcements by the authorities remains to be seen.
On the domestic front, Treasury continues to forecast a soft landing scenario, where the economy continues to grow as inflation gradually comes back to the RBA's 2-3% target band. The increase in government borrowings bolsters the outlook for growth in Australia; however, growth is still seen tracking a below-trend pace (sub 2.5%) over the next couple of years. As a result of below-trend growth, the unemployment rate is projected to rise to a peak of 4.5% with wages growth softening to a 3% pace. Headline inflation is forecast to return to the midpoint of the RBA target band in 2026/27.
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