Labor lays foundations for decade of deficits

Labor’s third budget has revealed $14.4bn in budget blowouts over the four years to 2026-27 as the Albanese government spends big on extra cost of living support.

Labor’s third budget reveals $14.4 billion in blowouts over four years to 2026-27.

Labor’s third budget has revealed $14.4bn in budget blowouts over the four years to 2026-27 as the Albanese government spends big on extra cost-of-living support from July and outlines major commitments as part of is Future Made in Australia policy.

The worsening fiscal outlook comes despite news of a $9.3bn surplus in this financial year – against an estimated $1.1bn deficit in December’s mid-year budget update – marking a second straight year in the black and a major political milestone for a government a year out, at most, from an election.

The rising deficits come ­despite a $26bn revenue upgrade over the next four years, with spending increases to more than offset the tax gains due to an improved outlook for wages and company profits.

Independent economist Chris Richardson said that even ­accounting for Treasury’s overly conservative forecasts around the outlook for key commodities, such as iron ore and coal, the ­additional $9.5bn in net new spending next financial year had made it “pretty hard” for Labor to land a third surplus.

“The bigger picture here is that this is as good as it gets for the budget. From here things get harder, because the revenue windfalls do ease back and we are juggling pretty rapid trajectories in defence and NDIS,” he said.

Despite the Treasury spruiking fiscal restraint over the past two year, Mr Richardson said “the bottom line is that our bottom line should be better right now”.

“The backdrop for the budget has never been this beautiful, and yet all we are managing is a return to deficits,” he said.

As the budget papers revealed Labor had saved 82 per cent of the windfall revenue gains since the May 2022 election – and 96 per cent in 2023-24 – Jim Chalmers told parliament on Tuesday evening that “pressures on the budget intensify after that, rather than ease”. After the first back-to-back surplus in nearly two decades, the budget flips from black to red from next year, with the underlying cash balance was now expected to deteriorate sharply to a $28.3bn deficit in 2024-25, or more than $10bn worse than projected six months earlier.

The deficit is then expected to widen further to $42.8bn in 2025-26, or $7.7bn worse than expected in the mid-year economic and fiscal outlook (MYEFO), before narrowing to $26.7bn in 2026-27 ($7.2bn worse) and $24.3bn in 2027-28.

All up, over the four years to 2026-27, the cumulative deficit was expected to be $88.5bn, or $14bn worse than estimated in MYEFO.

Labor’s policy commitments made since December, net of new savings measures, total $24.4bn out to 2027-28, offset by $12.6bn in budget improvements over those years as a result of economic conditions.

While economists believe another year of booming commodity prices could deliver a third surplus in the coming financial year, Treasury does not expect the budget to be back into balance until 2035, as costs continue to ­escalate across major areas such as the NDIS, aged care, defence, and health.

While deficits are larger than anticipated across the coming four years, the trajectory of gross debt is largely unchanged, rising from $904bn at the middle of this year, to $1.1 trillion by mid-2028. Net debt, however, is a little higher, lifting from $500bn in 2024, to nearly $700bn four years later.

While the dollar numbers on net debt are a little higher than projected in MYEFO, they are lower as a share of the economy, at 22 per cent of GDP by 2027, versus 24 per cent. Longer term, Treasury forecasts net debt to eventually return to its pre-Covid level of 19 per cent by 2035.