How $20b in hidden costs feeds the budget’s ‘debt-creation machine’

The federal budget has become a “debt-creation machine” as both sides of politics shuffle billions of dollars off the bottom line and funnel it into everything from cheap loans for finance companies to cutting-edge artificial intelligence companies.

Treasurer Jim Chalmers’ fourth budget will feature an underlying deficit of about $20 billion, but once these off-budget items are properly accounted the real deficit could be almost double.

Treasurer Jim Chalmers delivers the 2024-25 budget. It, like next week’s budget, won’t focus on the growing number of off-budget items being funded by taxpayers.Credit: Alex Ellinghausen

For these items to be considered an off-budget item, and not appear in the deficit that Chalmers will announce on Tuesday evening, they have to be considered a financial investment that will increase in value and one day deliver a return to the government.

That means a loan or an equity stake in a company does not hit the official budget bottom line, but building a suburban road or buying CCTV equipment will.

But economist and former Treasury official Stephen Anthony said as off-budget items have grown, they have clouded the true impact of government spending on the national economy.

“The federal budget is a debt-creation machine, and it’s currently running at 3-4 per cent of GDP. If you take into account these off-budget measures, then the deficit and the debt outlook is much grimmer,” he told this masthead.

For the current financial year, Chalmers had forecast a deficit of $26.9 billion. Described by economists as the “underlying cash balance”, it shows whether the government had to borrow money to cover its day-to-day operations plus investments in non-financial assets.

But it excludes cash flows from a host of off-budget items which, for 2024-25, were forecast to cost another $20.8 billion. The headline cash balance – which reflects both the underlying cash number and investment in financial assets – is forecast to reach $47.8 billion.

The single largest of these off-budget entities is student loans, covering everything from HECS-HELP to vocational and apprenticeship support.

The cost of these discounted loans was put at $2.9 billion in May last year. As these loans are treated as a financial asset, that loss did not hit the budget’s underlying cash balance.

Since then, the government has decided to wipe 20 per cent of student debt or around $16 billion. The cost of those loans jumped to $4.1 billion but because of the way these debts are treated within the budget, it did not directly hit the deficit.

The total cost of student debts was, in last year’s budget, put at $16.2 billion for the five-year period between 2023-24 and 2027-28. At the mid-year update, with the 20 per cent reduction in student debt included, the total cost had increased to $20 billion.

While HECS has been a bipartisan feature of the off-budget system since the 1980s, many other entities have joined the student loan scheme off books.

Sydney’s WestConnex project, originally budgeted at $10 billion but with a final bill of more than $20 billion, was partly funded through the off-budget process.

While the Northern Australia Infrastructure Facility ($3.2 billion over the next four years), Snowy Hydro ($7.1 billion in costs over the next four years) and the Clean Energy Finance Corporation ($19.3 billion) are large individual costs, the single biggest expense is an unidentified collection of organisations.

This “net other” group is expected to cost $20.1 billion by 2027-28 and $5.8 billion in 2025-26 alone.

The Finance Department declined to reveal the names of this group on commercial confidentiality grounds, but annual reports give some idea of the entities.

These include organisations such as the Regional Investment Corporation, created in 2018 to offer low-cost loans to the rural sector. In the 2023-24 financial year, it delivered $199 million in cheap finance to farmers.

Much of the work on the AUKUS submarine project will be carried out via off-budget agencies.Credit: Getty

Major defence entities such as Australian Naval Infrastructure, created in 2017 to oversee naval construction from the Osborne shipyard in Adelaide, and ASC (formerly known as the Australian Submarine Corporation), are also off-budget.

Some off-budget items are delivering a return. A Morrison government $1.5 billion loan to Indonesia to help it deal with the pandemic’s economic fallout will bring in $400 million by 2027-28.

Independent economist Chris Richardson said there was nothing wrong with putting a commercial enterprise off-budget if it was profitable.

“But we put far more than that off-budget. And if it’s a commercial failure, then write-offs (such as student debt) don’t go back on budget. That generates a bad loophole, and both sides of politics love loopholes far too much,” he said.

Treasury’s Anthony said the decision on whether these measures are counted in the budget bottom line should be given to an independent agency.

He said the growth in off-budget was hurting the nation’s productivity growth as taxpayers’ money was driven into businesses or parts of the economy that should fend for themselves.

“We have to lift productivity, by making an investment stand on its own two feet rather than getting directed by the central government. If you don’t like it, go to China,” he said.

Chalmers played down speculation that there would be a blowout in the overall off-budget numbers, suggesting they would come in better than forecast.

“This will be a [budget] deficit, but a smaller deficit than what we inherited, substantially smaller. One of the defining themes, not just of this budget, but the whole set of four budgets, is that we have helped engineer a $200 billion improvement in the budget position over the years that we’ve been responsible for,” he said.

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