Budget will remain in deficit forever without change

The federal budget will never come ashore, one of the country’s top budget watchers said, amid calls for Albania’s government to make radical reforms including a $54 billion overhaul of personal income taxes and cuts to generous tax incentives for real estate investors.

While Prime Minister Anthony Albanese has signaled that next year’s federal budget will be the starting point for the government’s long-term economic and social reforms, Deloitte Access Economics said that without major change the budget would remain in deficit, forcing young, ordinary taxpayers to pay the price for failing to cope with the country’s fiscal shortcomings.

Finance Minister Jim Chalmers will publish his mid-year budget update next week. In March, he predicted a $42.2 billion deficit for this fiscal year and predicted the budget would gradually reach a surplus by the middle of the next decade. Gross government debt, currently $957.9 billion, is expected to reach $1 trillion by mid-2026.

Deloitte estimates this year’s budget will improve slightly, putting it on track for a $38.9 billion deficit for 2025-26.

But report co-author and Deloitte partner Cathryn Lee said next fiscal year’s deficit will likely increase by at least $7 billion; and the budget will never recover due to the entrenched imbalance between spending and revenue.

He said the budget now depends on large and unexpected increases in tax collections.

“What matters now is disciplined, long-term actions to improve the profitability of the budget.
“tighter spending controls combined with reforms to the tax system,” he said.

The government has implemented modest tax reform since taking office; These include an overhaul of stage 3 tax cuts, two smaller tax cuts starting next year and mid-2027, as well as watered-down changes to Chalmers’ pension privileges for people with more than $3 million in their retirement nest egg.

But Deloitte said the government needed to go much further to repair the budget, boost efficiency across the economy and ease the pressure on a new generation of taxpayers.

It cost five tax reforms that would transform the budget. The biggest of these is increasing the current tax-free threshold from $18,200 to $33,000; Introduce a tax rate of 33 percent for incomes between $33,000 and $330,000, and 45 percent for incomes above this level, with the thresholds indexed by 2.5 percent each year.

Deloitte estimates the change will cost $54 billion a year by the middle of the next decade.

Other proposals include cutting the corporation tax rate to 20 per cent and balancing this change with a special tax on so-called super profits, expanding the GST and introducing a 10 per cent tax on inheritances (above the $100,000 threshold and excluding the family home).

Another option put forward by Deloitte is to reduce the current 50 percent discount on capital gains tax to 33 percent for items owned for at least 12 months.

The Senate is conducting an inquiry into possible changes to the CGT privilege. Critics say it has contributed to the country’s housing crisis since it was introduced by the Howard government.

According to Deloitte, reducing the concession would raise $4 billion annually by the middle of the next decade, helping potential home buyers.

Deloitte partner Stephen Smith said the budget’s dependence on personal income tax needed to change.

“We must be bold and open the debate on the appropriate taxation of capital and wealth,” he said.

“It is obvious that sticking to the current tax system will create intergenerational inequalities.

“As debts mount and reliance on personal income tax increases, the financial burden will fall disproportionately on the shoulders of young, working-age Australians.”

Chalmers said the government had already introduced meaningful economic reforms in areas such as competition, artificial intelligence and new environmental laws, with more to come in next year’s budget.

“There is more to do and people are still under pressure, so we are implementing tax cuts, reducing the cost of living and building a more productive and resilient economy,” he said.

The government is considering whether to extend the $150 energy subsidy, which is set to expire with the calendar year; This will create a $2 billion gap in this year’s budget.

Albanese said on Sunday that the subsidies were a temporary measure that were not intended to be permanent, but their future would be assessed ahead of a mid-year update. This week is the cabinet’s last chance to extend subsidies.

Amid calls for major reform, Albanese said the government was focused on delivering on promises made to voters ahead of the May federal election. He said new reforms are on the agenda for next year.

“This year is a step in the journey, so to speak, not the destination,” he told the ABC insider program.

“The work of reform is never done. Ahead of the budget in May next year, we will consider all policy measures. The economy is front and centre, of course. But also social policy.”