Ahead of the government’s 2024–25 Mid-Year Economic and Fiscal Outlook (MYEFO), Deloitte has predicted a significant worsening of the underlying cash deficit, forecasting a $33.5 billion shortfall, up from the official estimate 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,” Deloitte Access Economics partner Stephen Smith said.
“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,” he noted.
“Worryingly, there is little to suggest that the situation will right itself in the years to come.”
Deloitte spotlighted Australia’s heavy reliance on commodity prices, particularly iron ore, as a critical risk to the federal budget, with partner Cathryn Lee revealing that conservative commodity price assumptions have fuelled an average of $80 billion in revenue upgrades across the government’s past four budget updates.
“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,” Lee said.
“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.”
However, Lee criticised both major political parties for failing to uphold the fiscal discipline needed to secure the federal budget’s long-term health, warning that deep structural deficits make surpluses unattainable without “cyclically serendipitous commodity price booms”.
“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,” she said.
Deloitte Access Economics forecasts a cumulative $26.9 billion deterioration in the underlying cash balance over the four years to 2027–28 compared to projections in the 2024–25 budget. This is expected to drive net debt higher than previously forecast to 23.2 per cent of gross domestic product (GDP), up from the 21.9 per cent predicted in the 2024–25 budget.
Responding to Deloitte’s report, Treasurer Jim Chalmers acknowledged that it underscores the growing challenges facing the Australian budget.
“Our budget position in the mid-year update [in December] will be a bit weaker than what the Treasury forecast in May, but still much stronger than what we inherited,” he said.
“We’ve made a lot of progress in only two years – inflation is falling, real wages are growing, more than a million jobs have been created, we’ve overseen a $172 billion budget turnaround and taken action to address the biggest structural pressures like interest costs, the NDIS and aged care.
“But it’s not mission accomplished because people are still under pressure.”
Bold economic reform required
According to Lee, addressing Australia’s budget vulnerability requires bold economic reform. While recent aged care measures, productivity-focused funds, and energy transition initiatives show promise, she said they fall short of the structural overhaul needed to future-proof Australia’s economy and fiscal outlook.
“There has been a lack of substantive economic reform in Australia over a period stretching more than two decades,” Lee said. “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.”
Lee added that “the time will come for changes to tax”, noting that “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,” she said.
“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.”
