Australia Set for Big Budget Rebound, But Tax Cuts Cloud Outlook

A windfall from mining profits has helped Australia’s Labor government to nearly balance the nation’s books over the past year.

The Albanese government is set to reveal a major improvement in the budget bottom line next week as its coffers bulge with tax receipts.

However, a debate is raging among economists and government MPs over controversial tax cuts passed by the previous Liberal National government that will massively benefit the country’s highest earners – if the prime minister honours his pledge to endorse them next year.

That debate has begun to cast a huge shadow over future revenue raising, given the intensifying calls for greater spending on health and housing, and repeated complaints about the dismal level of support for jobseekers.

So, while figures to be revealed in the budget on May 9 may be pleasing, the huge fiscal challenge from the former Morrison government’s 2024/25 tax cuts means the national outlook is severe, if the centre-left Albanese government fails to modify them.

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More support for clean energy, defence

Treasurer Jim Chalmers has spent weeks using the words “restraint” and “responsible” to describe his second budget since coming to power in May last year.

There will be some money to offset cost of living pressures, particularly on energy prices, and perhaps a long-delayed rise in unemployment benefits.

Chalmers has flagged more support for renewable projects and a ramp up in defence spending with an eye to China’s expanding influence in the region.

Yet, he is well aware that too much fiscal largesse could stoke inflation just when the Reserve Bank of Australia (RBA) has aggressively lifted interest rates to fight it.

Instead, the aim is to bank any budget savings, and there are plenty to go around. High prices for Australia’s commodity exports have delivered a strong return from mining profits, while job gains boosted income tax and lowered welfare payments.

As recently as October, Chalmers had forecast a deficit of almost A$37 billion ($24.5 billion) for the year to end June 2023. Now, analysts expect it to be closer to A$5 billion.

Last budget surplus was 2008

Indeed, the running 12-month total is actually in surplus, a big deal for a budget that has not been in the black since 2008.

The previous Liberal National government had “Back in Black” mugs made in 2019 when it came within a whisker of a surplus, only for emergency pandemic spending to blow a record-breaking hole in the accounts.

Any surplus would be fleeting, however, given resource prices are well off their peaks and the domestic economy is slowing in the face of decade-high interest rates. The latter have also sharply raised the cost of funding the government’s near-A$1 trillion in debt.

Labor has promised, as noted, to honour a commitment by the previous government to slash income taxes from 2024/25 – cuts that are projected to cost a staggering A$254 billion ($168.7 billion) over the first 10 years.

The cuts are not especially popular with the public given the vast majority go to the higher paid, but Labor is loathe to break an election promise and seems boxed-in.

More money is needed for healthcare, particularly to fund a national disability scheme, and there are election pledges on childcare and infrastructure.

Defence is set for the biggest increase since World War Two amid plans to spend A$368 billion out to the 2050’s on nuclear powered submarines from the UK and United States.

“Spending on interest payments, pensions, medical benefits, defence, aged care and hospitals are all expected to rise consistently above the rate of inflation,” Stephen Halmarick, chief economist at CBA, said.

“To place the budget on a more sustainable footing over the medium-term will require an increase in revenue flow and/or more spending discipline.”

In short, Australia, like most developed economies with aging populations, is finding deficits could be the new normal.