Ahead of the government’s Mid-Year Economic and Fiscal Outlook (MYEFO) release, Westpac has released its preview, forecasting the bottom line at $4.1 billion, before it deteriorates in the outer years of the forecast period.
“We expect the bottom line to deteriorate by around $5 billion over the four years from 2024–25. This is a large change from recent budget updates where the expected bottom line has been revised significantly higher on the back of upgrades to expected tax revenue,” said senior economist Pat Bustamante.
According to him, the national fiscal impulse, a measure of how changes in net government spending contribute to demand growth, is expected to be around 2.75 percentage points of gross domestic product (GDP) in 2024–25, driven by recurrent and capital spending minus revenue.
This impact is projected to taper to 0.25 percentage points of GDP in 2025–26 before stabilising in subsequent years, according to updated estimates from the 2023–24 Final Budget Outcome and expected changes in the 2024–25 MYEFO.
Bustamante explained that the growing fiscal impulse stems from rising deficits and will require increased borrowing from an already “precarious” starting position.
Governments have already started to ramp up their borrowing, he said, with the recent national accounts showing borrowing of just under $40 billion in the September quarter 2024 – the highest since the September quarter of 2021.
“Given the growing fiscal impulse, we expect new government borrowing to increase to just over 6.0 per cent of nominal GDP this financial year and then 6.25 per cent of GDP in 2025–26,” Bustamante said.
“This would be broadly in line with what was borrowed at the height of the GFC, higher than what was borrowed during the protracted early 1990s recession, and only surpassed by government borrowing during the pandemic.”
Current state
According to the senior economist, the government recorded a shrinking surplus of $9.8 billion over the year to October, down from $25.8 billion a year ago.
Company tax collections fell short of forecasts by $1.7 billion in 2023–24 and $1.6 billion in the first four months of 2024–25, due to softer-than-expected non-mining profits and lower wash-up payments.
Moreover, iron ore prices remain higher than assumed in the May budget, at around US$105 per tonne compared to the projected US$70 per tonne.
However, heading into an election year, the government faces upward pressure on expenses, with cost-of-living measures like extending the $300 electricity rebate ($3.2 billion) and expanded childcare funding ($4.7 billion annually) likely to feature as flagship pledges.
