Deloitte Access Economics' Budget Monitor

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16 MARCH 2025: Following two consecutive surpluses, the Federal Government’s pre-election budget is expected to reveal an underlying cash deficit of $26.1 billion and revenue downgrades of $11.3 billion over four years, according to the latest forecasts from Deloitte Access Economics.

Releasing the March 2025 edition of the biannual Budget Monitor publication Deloitte Access Economics Partner and report co-author Stephen Smith said that although a $26.1 billion deficit is slightly smaller than the forecast in the 2024-25 Mid-Year Economic and Fiscal Outlook (MYEFO), the longer-term structural deterioration of the budget bottom line should be “a reality check for politicians wanting to announce election sweeteners in the weeks ahead.”

“Recent editions of Budget Monitor have offered a consistent warning on the Federal Budget position: 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 the forward estimates for upward revisions. Some luck on economic developments helps too.

“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.

Deloitte Access Economics Partner and report co-author Cathryn Lee said: “While unexpected strength in both the labour market and the fortunes of major companies is set to drive some revenue upgrades in 2024-25, a softer period for company profits and slower economic growth compared to the official forecasts means revenue is expected to be downgraded in later years.

“At the same time, spending pressures are escalating, particularly across health, aged care, the NDIS and defence. As a result, Deloitte Access Economics expects the underlying cash balance to be cumulatively $13.1 billion worse off over the four years to 2027-28 compared to the MYEFO forecasts. That would push net debt to 23.9% as a share of GDP from an estimated 19.6% in this financial year.”
 

Turn up the volume on reform talk

Cathryn Lee said: “Over the course of its term, the current government’s budget updates have revealed an average of around $84 billion in revenue writeups over the four year forward estimates period. 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. In other words, the economics is not aligning with the politics.

“The fiscal challenges facing the current government will be inherited by any incoming government. Ideally, the abrupt shift in the fiscal narrative would inspire a robust competition of ideas going into the election, with voters then having their say on meaningful proposals to put Australia on a firmer fiscal footing.

“Unfortunately, the election is more likely to put an outsized focus on flashy proposals designed to woo voters who are focused on their day to day. This will distract from a pressing policy issue facing the nation: the fiscal holes in Australia’s medium-term budget outlook are getting bigger, not smaller. And no politician is putting forward a credible plan to plug those holes.

“Deficits will not fix themselves. Plotting a path back to surplus will require hard decisions – including around how to best raise revenues to pay for the promises that both sides of politics want to keep. Today, the Australian conversation about the right level of revenue and the right mix of taxes is barely a murmur. It’s an increasingly important conversation for the nation’s future, and the volume needs to be turned all the way up.”

Stephen Smith added: “It’s worth noting that a minority government of either persuasion would present further political challenges for the budget. 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. That said, in the current parliament, it is the crossbenchers who have advocated for the most sensible reforms to the tax system.”
 

Beware of quick fixes

With a federal election just around the corner, this edition of Budget Monitor keeps a particular focus on the many methods politicians employ to obscure the fiscal impact of spending decisions.

Stephen Smith said: “One reason Australia’s longer-term fiscal health might not get the attention it deserves is because it’s too easy for politicians to paint the numbers any colour they feel. There are ways that governments can spend money – and run up debt – faster than what might be implied by the underlying budget balance.

“Off budget spending and revenue decisions are common, such as the recent changes to HECS debt repayments. Government investments that are expected to earn a commercial return also avoid showing up in the underlying budget measures. All these tricks obscure the debate around Australia’s long-term fiscal outlook and detract from an honest conversation about the fiscal challenge.”

“One of the other problems with Australia’s fiscal position is that temporary support measures – put in place to fix yesterday’s problems – tend to prove stickier than first intended. Handouts have a fundamental problem: if temporary support makes people better off, the end of that support inevitably makes people worse off. That means temporary handouts have a nasty habit of hanging around.

“Making the problem worse is the fact that the Federal Budget has a built-in mechanism to stealthily raise taxes on individuals without requiring politicians to announce any tax hikes. It is much more politically palatable to let bracket creep quietly erode the living standards of a large group of taxpayers than it is to announce the painful winding back of a temporary handout that will leave a smaller group of individuals worse off. As is often the case, good politics does not mean good policy.”

While lower inflation and commodity prices mean temporary revenue tailwinds are slipping away, structural challenges are pushing government spending needs steadily higher. Stephen Smith said: “Against this backdrop, it is critical that each new dollar of spending is delivering value for money. Unfortunately, in the lead up to a federal election, that is not the case.

“Value for money can be hard to come by in election years. But the long-term budget projections show deficits as far as the eye can see, and ineffective spending is the last thing Australia needs.”