Budget 2025: Into red zone and no way out as Labor accepts years of deficits

Treasurer Jim Chalmers has admitted there may be years of deficits as economists urge Labor and the Coalition to end the pre-election spendathon, tackle the structural deficit and improve productivity.

Treasurer Jim Chalmers, and the budget papers being printed on Sunday. Picture: NewsWire/Martin Ollman

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Jim Chalmers has accepted Australia is on track for years of deficits and “it remains to be seen” when the budget will return to surplus, as economists urge Labor and the Coalition to end the pre-election spendathon, tackle debt and improve productivity.

The Treasurer’s refusal to outline a timeline for the next surplus comes as Finance Minister Katy Gallagher declared the government would deliver $2.1bn in “savings and reprioritisations” in Tuesday’s federal budget, including lowering spending on consultants by $720m.

Senator Gallagher said the government had made $95bn of “savings and reprioritisations” since the 2022 election, as Labor trumpets its record on fiscal discipline despite overseeing ballooning commonwealth spending that has the nation on track for at least a decade of deficits.

The Australian understands the tax to GDP ratio will decline from 23.4 per cent forecast in December’s mid-year budget update to 23.1 per cent, blunting the ­Coalition’s claim a 23.9 per cent tax to GDP cap was needed to ­restore fiscal discipline.

Labor MPs are increasingly supportive of spending restraint in Tuesday’s budget, arguing the government needed to safeguard the nation for trade wars and economic uncertainty during Donald Trump’s presidency.

With the Coalition coming under scrutiny for lacking an economic agenda, Peter Dutton declared his budget reply speech on Thursday night would include a “big announcement”.

Opposition Leader Peter Dutton speaks at a press conference in Parramatta. Picture: Damian Shaw/NewsWire

While December’s mid-year budget update forecast a small surplus in 2034-35, leading economist Saul Eslake said he would not be surprised if this vanished from the projections in the budget.

“I doubt there will be any ­decision in the budget which makes it more likely we will see a surplus before 2034-35,” Mr Eslake said. (And it’s possible that previously projected surplus may disappear.”

Coming under pressure over an end to the two-year run in surpluses that were delivered thanks to higher than expected commodity prices, Dr Chalmers said “our government is defined by responsible economic management”.

“It remains to be seen when the next surplus is,” he told Sky News.

“It was almost two decades between surpluses but don’t forget the two surpluses that we’ve already delivered, and paying down all of that Liberal debt as a consequence, is saving us tens of billions of dollars in interest costs already and so it’s got a structural purpose to it.”

With Anthony Albanese on Sunday revealing the budget would include a six-month extension of the electricity bill rebate at a cost of $1.8bn, a report by EY called for a shift away from cost-of-living handouts to a focus on fiscal discipline and productivity-enhancing reform.

EY chief economist Cherelle Murphy said providing a “supportive and competitive backdrop” for business “could be a significant part of Australia’s armoury as we deal with the tail-end problems of high inflation, geopolitical strife, a trade war, climate change, and ageing”.

Cherelle Murphy, chief economist at Ernst & Young Australia

Ms Murphy said she was concerned “structural expenditure forecasts exceeding revenue for another decade” would make Australia less resilient to global economic shocks.

She said net debt was on track to rise from $540bn to more than $700bn by mid-2028, with a doubling in the interest rate bill to $27bn.

“Current policy settings will cause our debt burden to grow even if we avoid bad times, and if we don’t, there is no fiscal buffer to deal with downside scenarios, which means the debt and interest burden grow further,” she said.

Deloitte Access Economics partner Stephen Smith said Labor had done “next to nothing” to improve the structural state of the federal budget, pointing to an expected deterioration of the bottom line over the long run.

“We do need a stronger fiscal plan, and that goes for both sides of politics,” Mr Smith said.

“For quite a long period of time, when both Labor and the Coalition were in power … we’ve seen them consistently kicking the can down the road.” Mr Smith did, however, give credit to Labor for its efforts to “genuinely constrain” spending growth at a time when additional expenditure could risk inflaming inflationary pressures, a concern previously voiced by the Reserve Bank of Australia.

With Dr Chalmers flagging that deficits over the four-year forward estimates period would be “broadly similar” to those contained within the mid-year fiscal outlook, veteran budget watcher Chris Richardson lamented that any chance of improving the budget’s structural position was being mired by impending federal election, ­which is due by May.

While Labor MPs called for more cost-of-living relief in the budget beyond the rebates announced, many told The Australian the Treasurer needed to show constraint and demonstrate the country was being led by a “set of steady hands” in the face of a looming trade war.

Seven MPs who spoke to The Australian all urged the government not to “go overboard” on spending in the upcoming budget.

“I don’t think we want to be like shovelling money out the door,” one Labor MP said.

“I just want there to be some more, like meaningful, but not kind of irresponsible cost-of-living relief stuff.”

One Labor MP said they were expecting an announcement around electrification either in the budget or ahead of the election, while another said they believed “a couple of other things that will help with the cost of living” would be revealed on Tuesday.

“But we’ve got to be realistic. None of us really knows what the next three years under Trump is going to be, around these tariffs,” they said.

“There is an acknowledgment that people are still doing it tough, but also we’ve got to be responsible. And I think (Dr Chalmers) has done very well as the Treasurer … But the only problem is that … prime ministers want to stay in government, so I think there’ll be a couple more things to announce, but I don’t think we’re going to go overboard.”

Another said: “I imagine there will be one or two things they’re saving for budget night”, but also agreed the resilience of the economy ahead of any future US tariffs should be the priority.

One MP admitted this was “the budget that we didn’t know was going to happen”, and said it was important that it gave “a nod that people are still finding it tough”.

“We need to make sure that we have a resilient economy so that it can deal with shocks, whatever they may be,” the Labor MP said.

Opposition Treasury spokesman Angus Taylor said a Coalition government would re-establish fiscal guardrails inclu­ding the 23.9 per cent tax to GDP cap and “making sure you grow the economy faster than spending”. But he has not outlined policies on how the Coalition would lower taxes and spending, signalling income tax cuts would be considered only if there was “headroom” in the budget.

He would not commit to delivering a surplus if he became the treasurer.

“What we’ll do is we’ll make sure, over time, we’re moving to structural balance, and that’s the key here, which means growing the economy faster than spending,” Mr Taylor said.