Deloitte tips worst budget turnaround on record, excluding pandemic

Income tax, however, will be up slightly higher than expected because of a strong jobs market that has more than made up for the reduced tax take from the stage 3 cuts. Deloitte expects this to be about $8.2 billion higher than previously anticipated.

Costs associated with new policy measures, which takes into account the 2024-25 budget and decisions announced up until 13 November, will add $4 billion in spending over the forward estimates. About $1.4 billion of this is in 2024-25.

But Deloitte flagged that this “will be even higher” when the mid-year economic and fiscal outlook (MYEFO) is released due to the upcoming election.

Net debt is expected to hit 23.2% of GDP in 2027-28, compared to 21.9% forecast in the last budget.

The context: Treasurer Jim Chalmers indicated last week that the 2024-25 MYEFO, due in December, would include a downgrade of expected company tax receipts compared to the May budget forecasts.

The government has regularly pointed to its two consecutive surpluses as a signal of its responsible economic management.

The budget's underlying cash balance is under pressure due to long-term challenges, and the Intergenerational Report in 2023 forecast a 3% deterioration as a share of the economy over the next 40 years.

What they said: "Adopting conservative commodity price assumptions has regularly delivered substantial revenue upgrades to the federal 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," Deloitte Access Economics partner Cathryn Lee said.

"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.

"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.

"As several recent elections around the world have shown — from the United States, the United Kingdom, France, Japan and India, among others — the politics of inflation is diabolical for incumbents. As such, the balance between spending and inflation will be front of mind heading into an election in the first half of 2025."

Chalmers responded to the report by saying the government had "warned for some time that pressures on the budget are building, not easing, and this is consistent with that" with global uncertainty, including China, weighing on the outcome.

"Our budget position in the mid-year update will be a bit weaker than what Treasury forecast in May, but still much stronger than what we inherited," Chalmers said in a media statement.

"Our economic plan is all about fighting inflation without ignoring risks to growth, and we are making meaningful progress as highlighted by Deloitte’s report," he said.