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A second surplus – once more with feeling

The budget needs reform on both the tax and spending side to shore up Australia’s fiscal health for the long term.

The context for the 2024-25 Budget is complex. The Australian economy is in a precarious position, with household spending and dwelling investment both in the doldrums, and the relief of tax cuts and stronger real wage growth still not realised. Domestic inflation is in retreat, but is still not quite where it needs to be. 

The highwire balancing act of supporting growth but not reigniting inflation is the stuff of budget nightmares. While the RBA held rates steady today, it remained firm in “not ruling anything in or out” to ensure inflation returns to target in a reasonable timeframe. The Treasurer is therefore right when he talks about a greater ‘degree of difficulty’ in achieving a surplus for a second time, even if at least part of that messaging is surely intended to enable a greater level of crowing when that surplus is announced.

Indeed, announcing another year with the budget in the black will no doubt be a proud moment for the Federal Government. Consecutive budget surpluses for the first time in almost 20 years. Underlined. Exclamation mark. 

Deloitte Access Economics’ May edition of Budget Monitor estimates that the current string of surpluses is very likely to stop at two. With revenue projected to go backwards in 2024-25 as the redesigned Stage 3 income tax cuts come into effect and cyclical headwinds hit company taxes, the budget will be back in the red next year even if spending holds steady as a share of GDP.

Based on updated economic parameters and policy announcements to 18 April 2024, Deloitte Access Economics forecasts an underlying cash surplus of $13.4 billion for 2023-24 compared to the -$1.1 billion deficit forecast in the 2023-24 MYEFO.

However, the fiscal position looks increasingly dire the further out you look. With a set of known spending challenges looming on the horizon – and the likelihood of plenty of currently unknown spending challenges, too – the budget needs reform on both the tax and spending sides to shore up Australia’s fiscal health for the long term.

Chart 1: Underlying cash balance to GDP

Source: Deloitte Access Economics

There is still no credible action plan, for example, to suture the extraordinary growth in the cost of the National Disability Insurance Scheme (NDIS), while the budget allocation earmarked for defence has swollen remarkably. At the same time, the tax system is not fit for purpose – particularly, but certainly not solely, because of its heavy reliance on personal and company income tax. 

Australians will need to pay more tax in the years ahead in order for governments to afford the raft of long term spending promises made by both major political parties. How that tax is raised matters enormously for Australia’s prosperity.

And our deep, long-term fiscal deficit threatens to be eroded further if new industry policy is poorly designed or poorly implemented. A proper debate on new policies, including the Future Made in Australia policy, must focus on the costs and benefits of both doing nothing alongside the costs and benefits to taxpayers and consumers from interventions.

This newsletter was distributed on 7th May 2024. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Chelsea Boone, Senior Economist at Deloitte Access Economics

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