Tax cut hopes crash after $22 billion blowout

A $22 billion blowout in budget deficits and government debt crashing through $1 trillion have effectively killed the chance of Labor or the Coalition promising tax relief at next year’s federal election, amid warnings young Australians will bear the brunt of repairing the nation’s finances.

Treasurer Jim Chalmers used his mid-year fiscal update to reveal a budget awash in red ink, with government spending on everything from aged care to the GST accelerating through 2024-25 and a deficit for the coming financial year of $46.9 billion.

Treasurer Jim Chalmers and Finance Minister Katy Gallagher hand down the Mid-Year Economic and Fiscal Outlook.Credit: Alex Ellinghausen

In May, Chalmers forecast a deficit of $28.3 billion for the current financial year, but now expects it to ease slightly to $26.9 billion. But beyond 2024-25, the situation is much worse.

From the current financial year until 2027-28, Chalmers had forecast cumulative deficits of $122.1 billion. He is now forecasting $143.9 billion in red ink.

Shadow treasurer Angus Taylor accused the government of losing control of the budget with a spending splurge only eclipsed by events such as major wars or economic crises.

“Australians have to pay that bill, and they pay it either through higher inflation, higher taxes and/or higher interest rates. Right now, in recent times, we have seen around the world that kind of spending most of all translates into higher inflation. Every Australian has to pay the price,” he said.

Chalmers said the extra expenditure was unavoidable while claiming that without government spending, the economy – now forecast to expand by just 1.75 per cent this year – would be in trouble.

“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 in the budget,” he said.

The bigger deficits mean more debt. Gross debt, currently $911 billion, is expected to finish the financial year at $940 billion. It is forecast to climb to $1 trillion next year, $1.1 trillion the year after that, and hit $1.16 trillion by 2027-28.

The single largest blowout in cost has been the GST which will cost the budget an extra $6.7 billion by 2027-28.

While some of this is due to greater spending, $707 million is due to the ongoing bipartisan handout to Western Australia to lift its share of GST. The total cost of the deal, put in place by Scott Morrison, is now $37.4 billion over the forward estimates with the total bill by the end of the decade approaching $50 billion.

Higher interest rates on more debt means the government’s interest bill will cost it an extra $3.2 billion.

Payments connected to annual indexation will also climb sharply, led by a $3.6 billion increase in age pensions, a similar amount on disability pensions and $2.1 billion on JobSeeker.

Clearing a backlog in payments due to veterans left by the Morrison government will cost an additional $1.8 billion, on top of $6.5 billion revealed in the May budget, while natural disasters such as last year’s Cyclone Jasper will cost an extra $1.8 billion.

Chalmers said average real spending growth would be 1.5 per cent over the six years to 2027-28, half the 30-year average.

But this year alone, spending is forecast to lift by 5.7 per cent after a 2.9 per cent rise in 2023-24. By 2026-27, spending growth is tipped to ease to just 0.9 per cent. Spending as a proportion of the economy will grow to 26.5 per cent this year, before edging up to 27.2 per cent in 2025-26.

Financial markets actually increased the chance of an interest rate cut at the Reserve Bank’s February meeting.

The update revealed forecast company tax collections will be $6.6 billion down on what had been expected for the current financial year. But tax revenues from working people have been revised up by $8.9 billion this year and by $22.2 billion over the forwards estimates.

Pressed on whether he would go to next year’s election promising further tax relief, Chalmers said it would depend on the state of the budget.

“Whether it’s in the tax system or more broadly in cost of living, we’ve made it very clear that when governments can afford to, and there’s an economic case to, of course they should look to provide cost-of-living relief and/or tax relief when they can afford to do that,” he said.

Taylor, who has yet to announce his own spending plans, said the Coalition would have to re-establish “fiscal guard rails” to get the budget back in order before it had the “headroom” to offer tax cuts.

Credit: Matt Golding

The update revealed a key part of revenue – tobacco excise – is now in freefall.

Including 2024-25, the Treasury has wiped a cumulative $10.7 billion from tobacco excise over the forward estimates, with the government now expecting to collect $34.2 billion compared to $44.9 billion by 2027-28.

Independent economist Saul Eslake accused the government of squibbing hard decisions, while noting that both sides of politics had failed to be upfront with voters that public spending as a share of GDP had permanently increased over recent years.

“It’s going to be paid for by a combination of an ever-increasing personal income tax take due to ‘fiscal drag’ (which will fall much more heavily on wage and salary earners than those earning income in other ways), and larger budget deficits,” he said.

“In both cases, the burden is falling disproportionately on younger generations (the same ones who are finding it much harder to become home owners than their parents or grandparents did).”

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