Budget off-balance: Labor walks the debt and deficit tightrope

Jim Chalmers has presided over the biggest deterioration in the country’s underlying cash balance outside Covid and the global financial crisis, with a $43bn plunge into the red from a surplus last year.

Prime Minister Anthony Albanese with Treasurer Jim Chalmers before his fourth federal budget speech at the Parliament House.

Jim Chalmers has presided over the biggest deterioration in the country’s underlying cash balance outside Covid and the global financial crisis, with a $43bn plunge into the red from a surplus last year.

The country’s gross debt level will also hit $940bn this year and more than $1 trillion next year with the interest expense also hitting a record $24.4bn this year rising to $27bn next year.

Spending since the mid-year budget update three months ago has amounted to $7bn, with 20 spending measures announced and only three savings measures in the budget.

---

See more of The Australian’s federal budget coverage here.

---

That pushes last year’s surplus of $15.8bn closer to a $27.6bn deficit this year before falling further into the red to $42bn next year.

A massive $34bn in spending measures are booked for the forward estimates and $108bn in off-budget expenditures are locked in.

The Treasurer argued that the deterioration in the books was mostly inherited from the Morrison government’s forecast deficits, and that the repair job was the best any Labor government had undertaken.

“The $27bn deficit is almost half of what it was when we came to office. The deficit this year has been substantially shrunk and it’s the biggest single consolidation in a single parliamentary term we have held,” Dr Chalmers said.

“Next year’s deficit is $42bn, lower than what was forecast at the last election, and lower than at the mid-year update. In our first two years, we posted the first back-to-back surpluses in nearly two decades.”

The Treasurer is counting on continued growth in tax revenue, which hits $676bn or 23.5 per cent of GDP next year before rising to $707bn or 23.6 per cent of GDP. Labor said it had banked around 70 per cent of tax receipt upgrades in this term of government.

The $15bn surplus reflected higher-than-expected tax receipts of $20.4bn and lower-than-expected payments of $9.3bn.

Rich Insight economist Chris Richardson said the tax take had been better than expected, and the $17bn in tax cuts could be covered by just two years worth of bracket creep.

Net debt will hit a near record of $555bn, costing $14.8bn per year in interest expenses, before rising to a record $620bn and a record $18.5bn in annual interest expenses. The net debt is expected to be higher than forecast in the mid-year budget update, reflecting a change in the $304bn Future Fund investments, loans and placements, and the impact of lower interest rates on government borrowings.

Treasury expects the weighted average interest rate on its borrowings will be 4.3 per cent over the forward estimates, broadly reflecting global government borrowing costs and slightly lower than the 4.4 per cent expected at the mid-year update and following the first interest rate cut by the Reserve Bank in more than four years.

Gross debt as a percentage of GDP will hit 35.5 per cent next year, increasing to 36.8 per cent of GDP by 2028-29. The decline in gross debt relative to GDP in the first three years of the forward estimates since the mid-year update reflects upward revisions to nominal GDP, which Treasury officials said had been driven by higher commodity prices.

Citi chief economist Joshua Williamson said while the fiscal 2025 deficit was a sizeable number with deficits over the forward estimates, he did not expect higher interest costs for government. “We’re not expecting the bond market to jump,” he said.

The Treasurer boasted about better debt levels, arguing gross debt levels would be $177bn less than what was inherited, translating to $60bn less in interest costs over the decade.

“We’ve overseen the biggest-ever fiscal improvement in a single term of government,” he said.

“That’s been achieved through a combination of spending restraint, finding savings and banking revenue upgrades. We’ve made structural improvements to the budget across the NDIS, aged care and interest costs.”

Australia remains one of only nine countries with an AAA sovereign credit rating from all three major ratings agencies.