Chalmers defends Labor on economy as Deloitte tips budget deficit to plunge to $33.5bn

A pre-election burst in spending and a drop in company tax collections are expected to place further strain on the nation’s finances.

Treasurer Jim Chalmers in the House of Representatives on Monday. Picture: David Beach/NewsWire

A pre-election burst in spending and a drop in company tax collections are expected to place further strain on the nation’s finances, in what Deloitte Access Economics predicts will be the most severe deterioration in the budget bottom line ever recorded outside of the coronavirus crisis.

As Labor faces the final sitting week of federal parliament and prepares to update voters on the state of the budget, Deloitte ­estimates Canberra’s underlying cash deficit will be $33.5bn this ­financial year, $5.2bn worse than expected.

After posting a $15.8bn surplus last financial year, driven by soaring tax collections, the almost $50bn turnaround would represent the largest non-crisis ­deterioration in Australia’s fiscal position ever recorded.

With an election due by May and the Albanese government under pressure to provide ­additional cost-of-living handouts without exacerbating inflation, Deloitte predicts the deficit to widen further in 2025-26 to $46.8bn, $6bn worse than Treasury’s official projections.

Over the four-year forward ­estimates period through to mid-2028, Deloitte expects back-to-back budget deficits totalling $149bn, $26.9bn higher than Treasury’s estimate of $122.1bn.

The fresh forecasts come as Jim Chalmers prepares to release December’s mid-year budget update, with the Treasurer already foreshadowing smaller than ­anticipated company tax collections as a weaker Chinese economy weighs on demand for iron ore and other commodity exports.

Responding to the Deloitte ­report, Dr Chalmers pointed to the recent improvement in the bottom line as exceptional employment growth and soaring ­export earnings delivered an average $80bn tax revenue boost for each of Labor’s four previous ­budget updates.

“Deloitte’s report highlights the big budget improvement under Labor but it makes clear that there’s still a lot of work ahead of us to clean up the mess we inherited,” he said, citing Labor’s consecutive surpluses. “We’ve warned for some time that pressures on the budget are building, not easing, and this is consistent with that.”

The warning of a deterioration in the nation’s finances comes after Reserve Bank governor ­Michele Bullock this month called on Dr Chalmers to be “very conscious” of the inflationary impact of any pre-election policies, with sticky price pressures and bumper jobs growth prompting investors on Monday to push out their rate cut bets until August.

But Deloitte partner Stephen Smith said while Labor had shown restraint in banking most of the revenue upgrades it had received, he warned there would be ­growing pressure for Labor and the Coalition to offer further household support at the upcoming federal election.

“With an election due in the next six months, we would expect some more spending to go out of the door this financial year, and more again in the next financial year,” Mr Smith said, suggesting a range of cost-of-living relief was likely to be renewed.

Aside from pre-election handouts, Deloitte projected further expenditure pressures in the near term, with Labor’s aged-care reforms, fee-free TAFE and a range of other commitments to add an estimated $4bn in new spending over the forwards, including over $1.4bn in 2024-25 alone.

Deloitte expected the continued strength of Australia’s jobs market to deliver a modest contribution to the income tax take. ­Despite Labor’s overhauled stage-three tax cuts, revenue from ­personal income tax collections is expected to be $8.2bn higher in the four years to mid-2028, it ­estimated.

That increase, however, is not anticipated to fully offset other revenue writedowns. Indeed, the company tax take is expected to be $18bn lower over the forwards than Treasury’s previous estimates, Deloitte projects, as ­sluggish economic growth and weak Chinese growth trims corporate profits.

Overall, the budget is set to ­receive $1.6bn less revenue receipts in 2024-25, with a cumulative reduction of $16.4bn over the forwards.

Also contained within the ­Deloitte report was a projected surge in “off-budget” spending – including Labor’s plan to slash outstanding student debts at a cost of up to $16bn – masking the depth of Australia’s deficits.

Accounting for these outlays, Deloitte expects the so-called “headline budget balance” to record a $54.8bn deficit this financial year, before peaking at $70.1bn in 2025-26.

Mr Smith warned that governments were increasingly looking to ramp up off-budget outlays as a means to bolster their spending without it being accounted for in the more widely reported underlying measure.

“It’s smoke and mirrors,” he said. “These things should be thought of and counted when we look at the budget.”

Amid increased spending pressures and weaker tax collections, Deloitte expects a further rise in net debt. While Treasury’s official forecasts assume net debt will reach $702.9bn by mid-2028, ­Deloitte projects that figure to be significantly higher at $727.6bn.

The increase will push net debt to 23.2 per cent of GDP, up from 18.4 per cent recorded last financial year, but still short of the peak notched during the pandemic of 28.4 per cent.