Federal budget on track for much smaller deficit

FEDERAL finances are set to sink back into the red but a revenue boost from commodity prices and the strong labour market has helped shrink the forecasted deficit to $1.1 billion from the $13.9 billion predicted in May.

The improvement to the fiscal bottom line was well-signposted by Treasurer Jim Chalmers in the lead-up to the mid-year budget update, released today (Wednesday, December 13) though he warned ahead of time a second year in surplus would not be pencilled in for 2023-2024.

In 2022-23, a record $22 billion surplus was delivered.

The treasurer said the government’s decision to bank 92 per cent of the upward revisions to revenue since the May Budget will help pay down debt and take pressure off inflation, which is still rising too quickly.

He acknowledged financial pressures on families but the mid-year update contained no new cost of living relief measures, though the government will revisit the matter heading into the budget next year.

“This mid-year budget update is not intended to be a mini-budget or another budget,” Dr Chalmers told ABC Radio today.

A substantial cost of living relief package was announced in the last budget, including targeted energy bill subsidies.

Treasury estimates consumer prices, which have been rising more quickly than the Reserve Bank’s two-three per cent target range, are still expected to come back to the band in the June quarter of 2025.

However, in the near term, the inflationary pulse has proved stronger than expected, with the federal economic agency highlighting higher global oil prices flowing through to the petrol pump and adding a quarter of a percentage point to annual inflation in the September quarter.

Australia is also tracking towards a slightly stronger 12 months for economic growth, as solid public and business investment and the return of students and tourists post-pandemic offset sluggish home building and household spending weighed down by high inflation and interest rate hikes.

The 1.5 per cent economic expansion forecasted for the 2023-24 financial year has been upgraded to 1.75 per cent.

Economic growth is then expected to pick up as wages growth catches up with cooling inflation by 2024, supporting household spending and underpinning a 2.25 per cent lift in economic growth in 2024-25.

The labour market has proved resilient even as economic pressures intensify, though the unemployment rate is tipped to move higher to 4.5 per cent by June 2024.

Better-than-expected performance in the corporate sector and recent strength in the labour market are largely responsible for a revenue boost.

Income tax withholding has been revised up by $5 billion in 2023-24 and $15.9 billion over the four years to 2026-27, reflecting higher-than-expected employment and tax collections.

Company tax receipts have been revised up by $9.2 billion in 2023-24 and $34.5 billion over four years to 2026-27, with the near-term upgrade reflecting persistently strong commodity prices.

As well as a much smaller deficit in 2023-24, almost $40 billion in total has been wiped off deficits through to 2026-27.

Gross debt as a share of GDP is now expected to peak 1.1 percentage points lower than forecast at the 2023-24 budget, at 35.4 per cent of GDP in 2027-28.

A surplus for the 2023-24 financial year is still in play, with Treasury’s cautious estimates on future commodity prices meaning its predictions tend to be conservative.

 – WITH AAP