Chalmers reveals modest improvement to $150b deficit despite warning on AAA credit rating

Outside consultants and foreign students will be used to deliver a modest improvement to the budget in a second term Albanese government forecast to oversee $150 billion in deficits, despite warnings Australia could lose its AAA credit rating if the major parties fail to cut spending or find new sources of revenue.

As Treasurer Jim Chalmers declared that responsible economic management had been a “defining feature” of a government that is forecasting budget deficits into the next decade, ratings agency S&P Global said the nation’s finances were at risk from too much spending by all levels of government, US President Donald Trump’s tariff wars and sluggish economic growth.

Jim Chalmers and Katy Gallagher say the government’s election promises will improve the budget by $1 billion over four years.Credit: Catherine Strohfeldt

Chalmers and Finance Minister Katy Gallagher on Monday released the government’s costings for the election campaign, revealing a $1.1 billion improvement to the budget over the next four years. Cumulative deficits of $151.6 billion, which Chalmers forecast in his March 25 budget, are now expected to be $150.5 billion.

The modest improvement is due to a plan to save $6.4 billion by reducing the use of consultants, contractors and labour hire. Another $760 million is expected to be raised by increasing application charges for student visas to $2000 from July 1.

Credit: Matt Golding

The cuts and extra revenue were needed to offset a series of large election commitments, including the $2.4 billion cost of introducing a $1000 standard tax deduction, $604 million to help first home buyers, and $1.1 billion on free mental health services.

Some of the government’s various election promises, including $587.5 million earmarked for local infrastructure projects promoted by local candidates, were included in the March 25 budget.

The 2025-26 budget deficit, forecast in May to be $42.2 billion, is now expected to be $41.9 billion.

Chalmers, who released the full campaign costings earlier than previous administrations, said the numbers showed the government was committed to improving the budget.

“We will finish this election campaign with the budget in a stronger position than at the start of the election campaign,” he said.

But S&P, which famously downgraded the United States’ AAA credit rating in 2011, believes growing risks to the global economy, plus the use by both parties of off-budget commitments to meet their spending pledges, was putting the budget under risk.

“The budget is already regressing to moderate deficits as public spending hits post-war highs, global trade tensions intensify, and growth slows,” it said.

“How the elected government funds its campaign pledges and rising spending will be crucial for maintaining the rating.”

According to the agency, “lax fiscal discipline at the state level” – only Western Australia has an AAA rating – on top of the turmoil created by Trump’s tariff war and growing demands of federal programs such as the NDIS, defence, health and aged care would likely increase government deficits.

“If major election commitments aren’t funded via additional revenues or savings, the deficit could widen further,” it said.

Another concern raised by the agency is the use of off-budget items for major spending. The Albanese government has created several, such as its $19 billion Rewiring the Nation Fund and its $10 billion Housing Australia Future Fund.

Some of the promises it has announced during the campaign are being funded by off-budget programs.

Opposition Leader Peter Dutton is promising to axe both Rewiring the Nation and the Housing Australia Future Fund, but has promised to create his own Regional Australia Future Fund and a Future Generations Fund.

S&P said the use of these funds was “increasingly obfuscating Australia’s fiscal position and borrowing needs”.

Chalmers said the government took seriously the views of all credit rating agencies, but argued the pressure was on Dutton to outline his spending plans.

“I say to that particular agency, indeed all of the ratings agencies, that in our time in office, we have engineered the biggest positive turnaround in a budget of any parliamentary term ever,” he said.

“If you look at the monthly financial statements for the year we are in, we are making better progress this year than we anticipated in the budget.”

The monthly figures, released last week for the nine months to the end of March, suggest the budget is more than $12 billion ahead of expectations due to stronger tax collections and lower-than-forecast spending.

The cut in the use of consultants is on top of $5.3 billion in savings the government has claimed by reducing external labour costs since it came to office in 2022. Gallagher said the reduction in consultants contrasts with the Coalition which is planning to axe 41,000 public servants hired under Labor.

The Opposition has promised to produce a budget bottom line better than that forecast by the government. Dutton said his costings would be released “in due course”. He also said the Coalition’s proposed nuclear power industry, to be funded off-budget, would deliver a commercial return.

Opposition finance spokeswoman Jane Hume accused the government of spending an extra $10 million an hour since the budget.

“Our concern is that there is so much spending, it is almost inevitable that it will fuel inflation,” she said.

Cut through the noise of federal politics with news, views and expert analysis. Subscribers can sign up to our weekly Inside Politics newsletter.