Spending, not weather, is priority

Jim Chalmers has begun the necessary process of managing expectations for what will be a budget that finally punctures his claim that good judgment, not luck, was behind the back-to-back surpluses of the past two years. This budget will return to the red with deficits forecast well into the future.

The federal Treasurer puts the record straight when he admits revenue upgrades from historic high terms of trade were largely responsible for the earlier surplus results. He said that across the past 25 budget updates, revenue upgrades had occurred in less than half of them, and in only one in five budget updates before the pandemic.

Dr Chalmers will get another revenue upgrade for this budget but it will not be big enough to deliver a surplus because both commodity prices and export volumes have slipped back from their high levels.

As national income recedes, the warning from the OECD cannot be more stark. The latest OECD report revises down Australia’s growth projections for 2026 by 0.7 percentage points to 1.8 per cent. This is the biggest downward revision beside Mexico and Canada, which are engaged in a heated trade war with the US.

Despite the recent surpluses, Australia has experienced the most rapid increase in public debt as a share of its economy among developed nations, with government liabilities more than quadrupling since 2007.

This year’s federal budget is expected to show net debt surpassing $600bn next financial year. Australia’s percentage of debt to GDP still remains relatively low, however, when compared with most other OECD countries.

The challenge is to keep a tight rein on government spending as our terms of trade tighten and global uncertainty gathers pace. Neither side of politics has made a convincing case that it has a plan to drive the sort of budget savings and reform measures that are necessary. Dr Chalmers used a lot of his pre-budget address in Brisbane on Tuesday to highlight the pressures that were outside his control.

He said the global outlook pre-budget was one of disrupted trade, a slowdown in China, a war in eastern Europe and a fragile ceasefire in the Middle East. He said the OECD had downgraded its growth expectations for next year and the year after. Unemployment was rising overseas from higher interest rates, and in Britain inflation was going up again.

Dr Chalmers said Cyclone Alfred, which made landfall near Brisbane this month, would represent an immediate hit to GDP of up to $1.2bn and could wipe one quarter of a percentage point off quarterly growth. But, as we report on Wednesday, this is only a small fraction of the total government spending of $775.3bn forecast for 2025-26.

The challenge for Dr Chalmers is to ensure government spending, including big-ticket items such as the National Disability Insurance Scheme, delivers value for money to taxpayers. This includes the big problem area of energy. Dr Chalmers gave an unfortunate insight into his thinking when he claimed the government’s promise to cut energy prices by 25 per cent had been almost achieved in 2024 because government had picked up the tab with subsidies.

Budget discipline is more difficult than giving away taxpayer money, borrowing more to pay cost-of-living bills or offering commentary on the weather and outlook for global events over which there is little or no control.

Judith Sloan is correct that the long line of future deficits are overwhelmingly the consequence of decisions made by this government. Spending has risen under the Albanese government from $627bn to $730bn, while productivity growth has flatlined. Next financial year, government spending as a proportion of GDP is expected to be 27.2 per cent, a figure not reached during the global financial crisis.

Dr Chalmers clearly has work to do economically if he wants to persist with his budget sales pitch that Australian exceptionalism is our platform for progress.