Cyclone Alfred blows $1.2bn hole in federal budget

Jim Chalmers has warned Cyclone Alfred will cost the budget at least $1.2bn, hit economic growth and put upward pressure on inflation.

Federal Treasurer Jim Chalmers. Picture: NewsWire/Martin Ollman

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Jim Chalmers has warned that Cyclone Alfred will cost the budget at least $1.2bn, hit economic growth and put upward pressure on inflation, as Deloitte Access Economics forecasts deficits will blow out by $13bn over the next four years with net debt to reach 23.9 per cent of GDP.

In a speech to the Queensland Media Club in Brisbane on Monday, the Treasurer will warn the economic cost to the cyclone that impacted northern NSW and southeast Queensland will be “very significant” and wipe 0.25 per cent off growth in the March quarter.

He will reveal Cyclone Alfred increases the forecast budget spending on natural disaster-­related support to $13.5bn over the next four years.

“We are still getting a handle on the economic fallout, but it will be substantial,” he will say, according to an extract of his speech.

“The budget will book Treasury’s best, initial estimates: an immediate hit to GDP of up to $1.2bn.

“This could wipe ¼ of a percentage point off quarterly growth. It could also lead to upward pressure on inflation, from building costs to damaged crops raising prices for staples like fruit and vegetables.”

Dr Chalmers will forecast an initial hit to the budget of at least $1.2bn because of the cyclone, with millions “already flowing to people in the form of hardship payments and allowances”.

There have been 44,000 insurance claims lodged because of damage from Alfred, with early modelling suggesting insurers will be on the hook for about $1.7bn.

As Dr Chalmers moves to frame the cyclone as having a negative impact on the budget, a report by Deloitte warns the structural deficits were worsening due to growing government spending and declining revenues. The report forecasts net debt will grow by more than $200bn over the next four years to $747.4bn.

This would increase the proportion of net debt from 19.6 per cent of gross domestic product this financial year to 23.9 per cent of GDP by 2027-28.

Deloitte is forecasting the deficit this financial year will be $800m lower than the mid-year economic forecast, at $26.1bn. But the bottom line is predicted to deteriorate over the next four years on the back of an $11.3bn downgrade in revenues, with forecasts becoming more subdued on company profits and employment compared to MYEFO.

The report says that policies announced between December and March represent a net spending increase of $6.3bn over the next four years, with revenue measures not keeping up with spending growth.

The expected $13.1bn increase in deficits comes on top of MYEFO predicting deficits would be $22bn higher than expected when the budget was handed down by Dr Chalmers last year, representing a blowout of $35bn.

The forecast by Deloitte is ­vastly different from the one released this month by leading economist Chris Richardson, who predicted the 2024-25 deficit would be $11bn smaller than forecast in MYEFO.

Deloitte Access Economics partner Stephen Smith said the structural deterioration of the budget should be “a reality check for politicians wanting to announce election sweeteners”.

“Governments need to stop ­relying on ‘unforeseen’ revenue upgrades in place of a sustainable fiscal strategy. That warning is particularly relevant in 2025,” he said. “The recent recipe for a smooth budget update has involved the use of conservative ‘technical assumptions’ for commodity prices, which set a low bar for revenues and prime(d) the forward estimates for upward revisions. Some luck on economic developments helps too.

Deloitte Access Economics partner Stephen Smith.

Deloitte Access Economics partner Cathryn Lee. Picture: Supplied

“But that recipe may fail this time. Treasury’s commodity price assumptions look less conservative than they have for some time.

“And there are some genuine economic surprises on the downside that mean revenues are simply not going to measure up this time around.”

Mr Smith said the budget position was likely to become worse if there was a minority government.

“Crossbenchers have strong incentives to be associated with spending promises but can place the blame for the resulting deficits on the government of the day. That pattern of negotiation is not favourable to a sustainable improvement in the budget bottom line,” he said.

Deloitte Access Economics partner Cathryn Lee said “no politician” was putting forward a plan to deal with fiscal challenges.

“Over the course of its term, the current government’s budget updates have revealed an average of around $84bn in revenue write-ups over the four-year forward ­estimates period,” she said. “The projected write-down in the upcoming budget represents a significant shift in the narrative at a time when political spending pressures are at their most intense.”

Responding to the Deloitte report, Dr Chalmers said responsible management was “the hallmark of our first three budgets and will be a defining feature of our fourth”. “We have gotten the budget into much better nick at the same time as delivering substantial and responsible cost-of-living relief and investing in the future,” he said.