Watch out for smoke and mirrors of Jim’s magical surplus

Jim Chalmers has unveiled the bottom line black ink that has eluded all treasurers, Labor and Coalition alike, since Costello. So how did he weave his fiscal magic?

Welcome to Dr Jim’s amazing technicolour dreamcoat, once-in-a-decade, indeed once-in three decades, blink and you will miss it, Kool-Aid surplus.

We’ve had deficits every year since Peter Costello’s last budget surplus in 2007-08. We go straight back to having deficits – and ever-rising debt – every year from next year, 2023-24, all the way through to 2033-34. And indeed beyond that.

But for this one year, 2022-23, Dr Jim has conjured a surplus. A tiny surplus of just $4bn in a budget that spends over $630bn. But a surplus nevertheless.

So how did Dr Jim weave his – decidedly temporary – fiscal magic?

Back in March last year, then-treasurer Josh Frydenberg forecast a thumping $78bn deficit for this 2022-23 year which is just drawing to a close.

Now, just 14 months later, his successor Jim Chalmers has unveiled the bottom line black ink that has eluded all treasurers, Labor and Coalition alike, since Costello – with an amazing $82bn one-year turnaround.

Even more extraordinarily, just a single surplus in a sea of deficits, looking both back and forward as far as the fiscal eye can see.

He ‘did it’, by just letting the money roll in – mostly from our booming commodity exports, but also from soaring income tax, thanks to a stronger economy, more people working and that old fiscal favourite: bracket creep.

And then spending – on his own arithmetic – only 82c, 87c over his two budgets, of every dollar of that extra revenue.

Revenue this year will be up a mouth-watering $88bn on what Frydenberg had forecast for this year. Company tax is up a thumping $48bn – all those resources company profits – on the forecast of just 14 months ago, personal income tax up $33bn.

Spending though is up only $6bn on Frydenberg’s projection – and that gives you the $82bn turnaround into the black. But into the black for only one year.

The budget goes straight back into the red in the new 2023-24 fiscal year – to a $14bn deficit, and then bigger deficits of $35bn and $37bn after that.

Why? Because spending surges – by $51bn in a single year, outpacing the further $33bn rise in revenue; and keeps rising after that.

Federal Treasurer Jim Chalmers walking through the ministerial entrance of parliament before a press conference ahead of the federal budget announcement. Picture: NCA NewsWire/ Dylan Robinson

That year-to-year mix suggests that Dr Jim wanted his surplus, if only for a single year and however marginal, and by golly he was going to get it – by the tried and true fiscal trick of pushing spending from this year into next.

But beyond the bragging rights at G20 treasurer meets, the quality, the sustainability, of the claimed fiscal improvement, is decidedly dubious.

Over his two budgets, Chalmers has built in some $52bn of new spending out to 2026-27. That will only further escalate, every year after that.

He’s also increased taxes by $22bn over that time frame – and that’s not including the silent tax increase of bracket creep.

The big shift is of course the mammoth $180bn tax windfall over the four years, mostly from booming exports of coal, gas andiron ore, but also rising income tax, helped in big part by the explosion in migration bringing workers – and taxable incomes – into the country and into his budget.

The core point is that the new and increased spending, the new programs, the boosts to existing programs, is forever. And will be forever rising.

But the revenues? Who knows?

Yes, the budget forecasts the golden resources harvest will ease off. But certainly not go away.

While the income tax harvest will, after a hiccup in this coming year with the Stage Three tax cuts, go back to rising inexorably.

The budget, as always, assumes the overall economy just keeps ticking along.

But still the budget will be stuck in deficit in the – statistically ludicrous – long-term projections out to 2033-34.

Still the debt continues to rise. In gross terms from $887bn this year to $1067bn in 2026-27; from $549bn to $703bn in net terms.

And all this is after making the most heroic assumptions.

That the economy keeps ticking over nicely.

That the proliferating number of new and old budget programs don’t explode like the NDIS. Indeed, that the NDIS itself can be brought under control.

That tax revenues will just keep rising. That the three million-plus migrants who will come in this decade, add to those revenues and not excessively to the spending.

That we don’t get hit by a recession, by a GFC, by another Covid.

Enjoy the surplus. It might be the last we ever see.

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Originally published as Watch out for smoke and mirrors of Jim’s magical surplus