Budget 2025: Labor’s fiscal reckoning with debt to GDP on rise

Jim Chalmers’ debt outlook has worsened amid a pre-election spending spree of more than $67bn in three months, as Anthony Albanese sprays pre-election funding in marginal seats across the country.

Clockwise from top: Finance Minister Katy Gallagher and Treasurer Jim Chalmers on Monday; with Anthony Albanese on budget eve last year; in 2023; and 2022. Picture: NewsWire/Martin Ollman

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Jim Chalmers’ debt outlook has worsened amid a pre-election spending splurge of more than $67bn in three months, with both gross debt as a percentage of GDP and its expected peak projected to be higher than forecast in last year’s federal budget.

Analysis by The Australian ­reveals Treasury figures in ­Tuesday’s budget are expected to show gross debt as a percentage of GDP in 2024-25 will be higher than predicted in the May 2024 budget and in December’s mid-year budget update.

As Anthony Albanese sprays pre-election funding in marginal seats across the country, the ­nation’s gross debt is expected now to peak at 37 per cent of GDP, up from 35.2 per cent forecast by Treasury 10 months ago.

The updated projections, which will show gross debt hitting $940bn this financial year at about 36 per cent of GDP, emerge at a time when gross debt as a share of the economy would typically fall if economic growth lifted while borrowing remained constrained.

After banking consecutive surpluses on the back of a stronger-than-expected post-pandemic recovery and record revenue ­upgrades, the Treasurer on ­Tuesday is expected to reveal the nation faces at least a decade of deficits, with no surplus in sight.

Dr Chalmers declared the ­Albanese government had engineered a turnaround in the budget bottom line of $207bn since the last election. “We’re paying down Liberal debt and the budget will show that’s saving taxpayers tens of billions of dollars,” he said on Monday. “In dollar terms, Labor’s responsible economic management has delivered the biggest budget turnaround in a parliamentary term in history. By getting the budget in better nick, we’ve been able to find room to help with the cost of living, strengthen Medicare, and invest in the future.

“In less than three years, we’ve turned two big Liberal deficits into two Labor surpluses, shrunk this year’s deficit, and reduced Liberal Party debt by $177bn.”

Despite the first interest rate cut in more than four years aiding Dr Chalmers’ debt-management efforts, he is grappling with rising structural spending pressures, weaker commodity prices, lower migration and a greater reliance on personal income and company tax takes.

While the Treasurer is highlighting gross debt levels, which Labor politicised during the pandemic when it attacked the Morrison government for amassing a trillion dollars of debt, most economists focus on net debt which takes into account all government’s assets. Economists consider measuring debt to GDP as an important indicator because it reflects a ­government’s ability to repay its debts relative to the revenue it can bring in.

Rich Insight founder Chris Richardson said that while gross and net debt were in comparatively good positions compared with other countries, Australia must be careful about complacency. “All that it takes is a minor bit of bad luck and your comparatively good debt position can deteriorate,” he said. “The problem is we don’t have a budgetary rule for bad luck. We have one for good luck which is don’t spend all the windfall, but there’s no rule for when the windfall dries up.”

Mr Richardson said declining commodity prices, weaker migration and lower inflation would make debt management harder. Still, Australia’s big debt position also has a “mortgage offset” with assets such as the $300bn ­Future Fund.

Ahead of delivering his fourth budget, the Treasurer is using dated 2022 pre-election cconomic and fiscal outlook forecasts to claim that gross debt will be $177bn lower this financial year than projected in the PEFO.

The government says the nation will avoid about $60bn in interests costs over 11 years to 2032-33, despite higher borrowing costs. Contrasting updated Treasury forecasts with the PEFO numbers, Dr Chalmers will claim that gross debt as a share of GDP is now expected to peak at 37 per cent, which is 7.9 percentage points lower than projected in 2022.

Weeks before Labor ramped up its spending over the past three months, Dr Chalmers’ mid-year budget update in December said the government’s commitment to improving the budget would be underpinned by “limiting growth in spending until gross debt as a share of GDP is on a downwards trajectory”.

Following an election-eve deal with the Queensland ­government, which increased new commonwealth funding for public schools by $16.5bn, Mr Albanese on Monday dodged a question about whether he hoped another surplus would be delivered during his tenure as Prime Minister.

With the Coalition’s tally of Labor spending announcements and policies that hit the budget bottom line topping more than $67bn in the past three months, opposition Treasury spokesman Angus Taylor said the Albanese government was “the biggest spending government since the Second World War, with nothing to show for it”.

“After three years and three failed budgets, Labor has overseen a historic collapse in our living standards, higher taxes and a weak economy,” Mr Taylor said. “The budget must deliver for the next five years, not just the next five weeks. Australians can’t afford three more years of Labor’s economic mismanagement.”

From January to March, the Albanese government has rolled out health, cost-of-living, housing, infrastructure, manufacturing, schools, energy and natural disaster funding announcements worth tens of billions of dollars. The spending spree aimed at wooing target voters include the $8.5bn Medicare package, $1.8bn for energy rebates, $689m for cheaper medicines, $7.2bn for the Bruce Highway upgrade and more than $5.3bn for infrastructure projects in the key election states of NSW and Victoria.

Dr Chalmers said the budget “puts a premium on responsible economic management, helps finish the fight against inflation and ease the cost of living for Australians”. “We’ve made a lot of progress together, the budget is in much better nick now than when we inherited it, but there’s more work to do,” he said.

In her latest savings drive, ­Finance Minister Katy Gallagher said she had found $2.1bn in “savings and reprioritsations” including lowering spending on consultants by $720m.

The Australian on Monday revealed the tax-to-GDP ratio would decline from 23.4 per cent forecast in MYEFO 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.

Asked if Labor can deliver a surplus if the Albanese government is re-elected in May, Senator Gallagher said it remained to be seen. “Budgets are a combination of hundreds of decisions, and they also reflect the economic circumstances of the time. There’s no doubt the budget’s under pressure,” Senator Gallagher said. “We’ve got budget repair, so $95bn worth of savings that we’ve found over the last four budgets, to make sure that we can invest into those services and a responsible approach to managing the debt, lowering the interest costs on that debt, all helps in repairing the budget and repairing it over time.”