Treasurer Jim Chalmers: Budget deficit hits $27b: Spending, higher indexing to blow out 2025/26 Budget to $50b

Labor and the Coalition have drawn the battlelines for a “tax and spend” versus “slash and burn” contest in next year’s election, after the Treasury’s mid-year Budget update predicted a gloomy outlook of lower growth and wages.

But in the war of words on how best to tackle the ballooning deficit, neither major party appeared willing to openly commit to the tough reforms required to reduce it.

The much-anticipated Mid-Year Economic and Fiscal Outlook (MYEFO) forecast the full year Budget will record a deficit of $26.9 billion, $1.3 billion better off than originally forecast in May, but new spending and higher indexed payments are expected to blow out next year’s Budget to a deficit of almost $50b.

Despite the positive spin that the country’s Budget position is $200bn better than inherited, and the promise of extra cash for childcare, healthcare and cost-of-living relief, as well as higher employment, the Treasury forecasts lower growth and wages than it had previously predicted in May.

Recovery in household spending is expected to be slower as high interest rates continue to bite.

Treasurer Jim Chalmers said the Government had “struck the right balances” to keep its primary focus on inflation and the cost-of-living, and responsibilities to support Medicare, pensions and medicines, without ignoring very substantial risks to growth.

“Our gross debt position is a fraction of what we see in comparable countries,” he said.

“This is a responsible set of books, which reflects the very substantial progress that we have made cleaning up the Budget, two surpluses in the first two years, a smaller deficit this year,” an upbeat Dr Chalmers told reporters in Canberra.

“The Albanese Labor Government has delivered the biggest-ever Budget turnaround in a parliamentary term due to a combination of limiting real spending growth, identifying savings and banking the majority of revenue upgrades since we came to office.”

Shadow treasurer Angus Taylor immediately went on the offensive against the “biggest spending government we have seen out of outside of wartime or crisis,” that would leave Australians footing the bill “either through higher inflation, higher taxes and or higher interest rates.”

Accusing the Treasurer of “Orwellian spin” he said: “There is absolutely no pathway in this update to a restoration of Australians’ standard of living.”

But he failed to flesh out key details of the opposition’s own sums or counteroffer to voters, deferring a pledge to lower personal income taxes until headroom and fiscal guardrails could be re-established, and deflecting questions on the mechanics of the Coalition’s assertion that its nuclear policy will slash power prices by 44 per cent.

When the modelling for the Coalition’s controversial nuclear policy was released last week by Frontier Economics, it estimated adding nuclear energy to the power grid would cost 44 per cent less than the Government’s current full-renewables plans. It did not predict the impact on power bills.

Mr Taylor insisted there was “no doubt” that it would.

If Labor was to win another three years in office, Australia would see an additional two million migrants without supporting housing infrastructure, he said.

But when pressed on the Coalition’s plans to reduce migration Mr Taylor said: “We’ll have more to say about that in a couple of weeks.” He insisted the opposition was not walking back its proposal earlier this year to halve net overseas migration to 160,000.

The less than rosy economic picture painted by the Treasury in MYEFO has fuelled speculation that the Government will hold off on calling an election until a more optimistic financial blueprint can be presented at the March Budget.

However, the Treasurer stressed the latest figures “show an improvement in the bottom line for this year since the Budget, and a big improvement to the bottom line since the [2022] election.

“The deficit for this year is now $1.3b smaller in this Budget update, and almost half the $47.1b deficit we inherited for this year from our predecessors.”

The overall deficit is smaller than the $33.5b forecast by Deloitte Access Economics.

While the last four Budgets benefited from average revenue upgrades of $80b, this year’s company tax receipts have been revised down by $6.6b in 2024–25 and $8.5b over the forward estimates.

“For the first time since the 2020–21 Budget, company tax receipts have been revised downwards, reflecting weaker commodity volumes amid emerging challenges in the Chinese economy,” the Budget papers said.

Individual taxpayers will be slugged an extra $8.7 billion in 2024–25 and $21.5 billion over the four years to 2027–28, due to higher employment and wages.

MYEFO shows a deterioration in both deficits and government debt over the next four years. Deficits are projected to increase by $23.2b to 2027–28, a 25 per cent rise, driven by $4.4b in additional payments and $32b in new spending.

The deficit is expected to widen by $4.1b next year, peaking at $46.9b in 2025–26 (1.6 per cent of GDP), before moderating. Treasury assumes GDP growth will reach at least 2.75 per cent between by 2028.

Among the new spending initiatives are an extra $3.6b for wages for early childcare workers, $2.5b for new drugs on the Pharmaceutical Benefits Scheme, and $1b for the energy transition.

A further $25b in previously unbudgeted spending over the next five years will come from “payments from parameter and other variations,” including $9.5b for wage rises for aged care workers, $4b for age pension indexation, and $3.7b for an anticipated uplift in childcare subsidies due to increased demand.

Dr Chalmers defended the additional payments as essential for cost-of-living relief and dismissed claims they would fuel inflation.

“A lot of this spending is pressure that no responsible government could deny. We’re talking about extra kids enrolled in early childhood education. We’re talking here about indexation of the age pension. We’re talking about strengthening Medicare,” Dr Chalmers said.

“So when our opponents say that there is too much spending they should nominate which of this spending on Medicare or medicines or pensions do they think is inappropriate. It would be madness, not just in fairness terms, but it would be madness in economic terms, given how little growth there is in the economy right now to slash and burn the Budget.”

Gross government debt is now forecast to hit $1 trillion next year and grow $49b higher over the forward estimates, reaching 36.7 per cent of GDP by 2027–28, up from 34 per cent this year. As a percentage of GDP, it remains less than half the debt levels of most advanced economies, which average 105 per cent of GDP.

According to the Budget papers, interest payment on debt will be the largest single drain on the Budget over the next ten years, expected to grow by 11 per cent annually. The next highest spend is the NDIS, which is forecast to grow more than 8 per cent annually, with defence and hospitals growing more than 6 per cent annually through to 2035-35.