Surprise Budget will show longer term deficits

This week’s Federal Budget should be the economic centrepiece for this year but instead it is looking like something of an accident.

The reason, of course, is that this is the Budget that was never planned to happen.

In its place there should be an election campaign in full swing but due to the Queensland cyclone Alfred, the election was postponed and the Budget was suddenly back out of hibernation.
So what should we expect to see in this accidental budget?

Hopefully and perhaps surprisingly, we may not get a large raft of election promises given the hints that Treasurer Jim Chalmers has been giving about the budget position and also the economic circumstances happening due to the burgeoning trade war being waged by President Trump.

Challenging outlook tempers new promises

In Dr Chalmers own words the economic outlook is looking very challenging and uncertain and Australia will be far from immune from the continuing raft of tariffs that are adding significant clouds to the trade outlook.

With two budget surpluses in the bank and the current financial year also looking like surprising with a much smaller deficit, we might have expected some more big, shiny promises and possibly even some much-needed tax reform.

Instead, it looks like the Budget may be relatively austere given that much of the unexpected government revenue that has arrived over the past couple of years owes its existence to non-repeatable factors including the war in Ukraine, which unexpectedly boosted the value of mineral exports.

Some big promises already made

It is important to note as well that there have already been some expensive promises made including $8.5 billion for Medicare, $7.2 billion for the Bruce Highway upgrade and $3 billion to improve the National Broadband Network.

All have been matched by Opposition Leader Peter Dutton so the Budget is likely to leave leeway for a series of smaller pre-election promises to be made but don’t expect too much.

According to a Budget forecast prepared by Deloitte, the budget is expected to reveal an underlying cash deficit of $26.1 billion for the 2025 financial year, while forward revenues are expected to deteriorate by $11.3 billion over four years.

If the Deloitte report is correct this deficit will mark an $800 million improvement over the projections contained in the 2024-25 mid-year economic and fiscal outlook (MYEFO).

One last sugar hit of surprise revenue upgrades is set to boost the numbers but these extra taxes are expected to start drying up in the 2025-26 financial year, with Deloitte expecting deficits to worsen

Taxes predicted to wane

Indeed, in the four years to 2027-28, Deloitte expects a cumulative deterioration in the underlying cash balance of $13.1 billion compared to the latest official forecast – a major change from the underlying cash surplus of $15.8 billion in the 2023-24 financial year.

Whether Deloitte’s projections are accurate or not, Treasurer Chalmers’ own caution in his remarks leading up to the Budget are enough to give us a hint so any direct cost of living support that’s handed out during the election will be relatively minor in the scheme of things.

Surpluses came from one-off revenue gains

“The magnitude of this turnaround illustrates the extent to which surpluses in recent years were the result of cyclical revenue gains rather than structural improvements in the budget,” said the Deloitte report.

“Those surpluses still required fiscal discipline – surprise revenue upgrades were mostly saved rather than mostly spent.

“But banking on revenue to surpass Treasury’s forecast does not make for a sound fiscal strategy,” said the report.

As the report pointed out, Australia faces some large fiscal holes in the medium-term budget outlook and these holes are getting bigger rather than smaller with little visibility on either side of the political spectrum for means of closing these fiscal gaps.

Anyway, the speculation will this week make way for the real thing with the release of the Budget on March 25.

Just don’t expect too many expensive promises or many answers for Australia’s longer term Budget imbalances.