Deloitte reveals Budget position is worse than feared and Government must face up to need for economic reform

Labor is set to deliver the largest swing from surplus to deficit in the nation’s history barring the pandemic, as softer growth, lower commodity prices and falling migration slug the Budget bottom line.

According to Deloitte Access Economics’ annual Budget Monitor, Jim Chalmers is predicted to reveal an underlying cash deficit $5.2 billion worse than predicted in the 2024-5 budget, bringing the overall deficit to $33.5b compared to the official forecast of $28.3b. Based on updated economic parameters and policy announcements, Deloitte Access Economics expects the total deterioration from last Budget to the next to total $49.3b.

The report revealed that previous budgets have benefited from ‘unforseen’ revenue upgrades thanks to conservative estimates of the iron ore price, but this budget is expected to show significant downgrades as a result of continuing softness in the Chinese economy.

“Those upgrades have been the driving force behind the recent, extraordinary short-term swing from pandemic-induced deficits to the first consecutive underlying cash surpluses in almost two decades,” said Deloitte Access Economics Partner, Cathryn Lee.

“The structural budget position — that is, what the budget balance looks like after correcting for the swings and roundabouts of the economic cycle — is in deep deficit, meaning that without cyclically serendipitous commodity price booms, a surplus is out of reach.

“This is exactly what is playing out in 2024-25. While Australia appears to have achieved the much-vaunted soft economic landing that policymakers had been seeking, the federal fiscal position is returning to Earth with a thud.”

Treasurer Jim Chalmers, who will deliver the Mid Year Economic and Fiscal Outlook (MYEFO) next month, agreed that the budget position will be weaker than forecast in May but still stronger than what Labor had inherited.

“Our economic plan is all about fighting inflation without ignoring risks to growth, and we are making meaningful progress as highlighted by Deloitte’s report” Dr Chalmers said.

“We’ve made a lot of progress in only two years — inflation is falling, real wages are growing, more than a million jobs have been created, we’ve overseen a $172 billion budget turnaround, and taken action to address the biggest structural pressures like interest costs, the NDIS and aged care, but it’s not mission accomplished because people are still under pressure.”

Deloitte Access Economics (DAE) report comes after Dr Chalmers delivered a Ministerial Economic Outlook to the House last week warning that any revenue upgrades would be a “sliver” of what had been seen in the previous four Budgets primarily as a result of the 30 per cent drop in the iron ore price. DAE expects there will be a revenue downgrade in the MYEFO.

Stephen Smith, report co-author and Deloitte Access Economics Partner said the future for the budget looked bleak.

“Worryingly, there is little to suggest that the situation will right itself in the years to come,” he said.

“In the United States, Donald Trump’s emphatic victory is impossible to either ignore or deny. Should substantial tariffs be slapped on imports into the United States, including at rates of up to 60 per cent of goods from China, Australia’s federal budget will not be immune.

“The Chinese economy is already reeling from a dislocation of the property market, high debt levels and worsening structural challenges such as a declining population. An enormous glut of tens of millions of unsold residential properties is weighing on prices and undermining housing construction and steel demand. In turn, Chinese demand for Australian iron ore is flagging.”

The report highlighted the longer-term issue of ongoing budget deficits that would see the deficit blow out to $46.8b in 2025-6 and net debt grow to 23.3 per cent of GDP by 2027-28. That will be driven by an extra $4b of extra spending over the forward estimates for new policies announced since the 2024-25 budget.

The report’s authors said it was critical governments faced up to the need for economic reform.

“The composition of the Australian economy means it will always be more exposed to global commodity prices than most other developed economies. Even so, building a more resilient federal budget with a firmer structural balance and with better safeguards against commodity price exposure is possible, but it requires change. Chalk that up as another reason why productivity-boosting economic reform and substantive changes to the tax system are desperately needed,” said Ms Lee.

“The time will come for changes to tax. It must. Economists know that proper tax reform, done correctly, can be good for the economy, good for the prosperity of Australians, and good for the budget. Governments hoping to continue to unveil ‘surprise’ revenue upgrades year after year will be disappointed. Australia needs a more sustainable fiscal strategy.”

The report’s authors raised concerns that there would be increased spending in the next year in an attempt to provide cost of living relief for struggling households.

The expectation was that there would be pressure to promise more support during a competitive election campaign and that the possibility of a minority government and larger cross bench would make it harder to repair the budget by removing household support.