Deloitte Access Economics’ Budget Monitor – Soft landing, hard truths
Deloitte Access Economics’ forecasts in this edition of Budget Monitor predict an underlying cash deficit for 2024-25 of $33.5 billion, compared to the official forecast of $28.3 billion.
Deloitte Access Economics’ latest Budget Monitor has been published, revising down expectations for the Federal Budget ahead of the release of the Mid-Year Economic and Fiscal Outlook (MYEFO).
Over the past few years, the themes underlying Deloitte Access Economics’ Budget Monitor commentary have carried a consistent message: relying on ‘unforeseen’ revenue upgrades is not a sustainable fiscal strategy. That axiom has rarely been more relevant than it is right now.
Adopting conservative commodity price assumptions has regularly delivered substantial revenue upgrades to the budget for much of the last decade. During the term of the current government, for example, each of the four budget updates that have been published to date have revealed $80 billion in revenue upgrades, on average.
Those upgrades have been the driving force behind the recent, extraordinary short-term swing from pandemic-induced deficits to the first consecutive underlying cash surpluses in almost two decades.
The government still deserves credit. Most of the ‘unexpected’ revenue which has flowed into federal coffers over the past two years has been saved rather than spent. That has required discipline, particularly given the calls for more cost-of-living support that have reverberated throughout the community during that time.
More generally, however, over the last two decades both major political parties have fallen short of the standard of fiscal rectitude necessary to ensure the long-term health of the budget. The structural budget position – that is, what the budget balance looks like after correcting for the swings and roundabouts of the economic cycle – is in deep deficit, meaning that without cyclically serendipitous commodity price booms, a surplus is out of reach.
This is exactly what is playing out in 2024-25. While Australia appears to have achieved the much-vaunted soft economic landing that policymakers had been seeking, the federal fiscal position is returning to Earth with a thud.
It has already been revealed that the 2024-25 MYEFO will see Treasury downgrade expectations for company tax relative to the forecasts set out in the 2024-25 Budget released in May. Deloitte Access Economics’ forecasts in this edition of Budget Monitor go further, predicting a worsening of the underlying cash deficit forecast for 2024-25. A deficit of $33.5 billion is anticipated, compared to the official forecast of $28.3 billion.
If realised, that would represent a deterioration in the budget bottom line of more than $49.3 billion following the $15.8 billion surplus inked in 2023-24. That stunning turnaround in Australia’s fiscal fortunes would be the largest nominal contraction in the underlying cash balance on record, excluding the pandemic-hit budget of 2019-20.
Chart 1: Underlying cash balance to GDP
Source: Deloitte Access Economics based on Commonwealth of Australia data
Worryingly, there is little to suggest that the situation will right itself in the years to come.
The longer-term pressures facing the Commonwealth’s fiscal position have been well documented by the Parliamentary Budget Office and in the projections published in one Intergenerational Report (IGR) after another. The latest IGR, published in 2023, noted the federal budget’s underlying cash balance is expected to deteriorate by almost 3% as a share of the economy over the next four decades.
The composition of the Australian economy means it will always be more exposed to global commodity prices than most other developed economies. Even so, building a more resilient federal budget with a firmer structural balance and with better safeguards against commodity price exposure is possible, but it requires change. Chalk that up as another reason why productivity-boosting economic reform and substantive changes to the tax system are desperately needed.
There have been steps in the right direction. Recently announced aged care reforms and the new $900 million National Productivity Fund both represent good policy, alongside the energy transition reforms that are underway. It’s also been great to hear the Treasurer talk more about Australia’s productivity challenge and the need for reform in recent speeches.
However, more generally, there has been a lack of substantive economic reform in Australia over a period stretching more than two decades. That has resulted in a coddled and cosseted economy bereft of competitiveness and dynamism. Economic and productivity growth are moribund and real incomes are declining, while income, wealth and intergenerational inequality has morphed into a broader schism through Australian society.
The time will come for changes to tax. It must. Economists know that proper tax reform, done correctly, can be good for the economy, good for the prosperity of Australians, and good for the budget. But if triggering tax reform requires a crisis of the scale which besets Australia’s housing sector, for example, it may be too little too late. In the meantime, governments hoping to continue to unveil ‘surprise’ revenue upgrades year after year will be disappointed.
Australia needs a more sustainable fiscal strategy.
This newsletter was distributed on 26th November 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Cathryn Lee, Partner at Deloitte Access Economics
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