Taxpayers to be on the hook for an extra $60 billion in spending in the May budget
The nation’s taxpayers will have to spend at least $60 billion more on everything from public hospitals to the effects of hurricanes and floods, putting more pressure on Finance Minister Jim Chalmers to find savings in next month’s federal budget.
With the fiscal plan already under pressure from rising inflation and the economic consequences of the US-Israeli war against Iran, policy decisions and some inevitable fiscal blows have increased the challenges facing Chalmers and Finance Minister Katy Gallagher.
The 2026-27 budget, which Chalmers predicted in his mid-year update to run a $34.3 billion deficit, is expected to show a short-term increase in revenue as commodity prices and inflation drive stronger-than-expected tax revenues from companies and workers.
But higher inflation also means an increase in indexed benefit payments, including those to carers (which will cost an extra $1.5 billion over the next four years) and older pensioners ($1.5 billion).
In a sign that Chalmers expects the war to hit the national job market, Jobseeker payments are forecast to be $3.2 billion higher than forecast in the mid-year update, and disability support pensions are also forecast to be $4.4 billion higher.
The biggest hit to Chalmers’ budget came from the government’s renewed five-year hospital agreement with the states; This agreement is expected to cost an additional $25 billion to the budget. New medicines and amended lists in the Medicines Benefits Scheme will add $6 billion to the budget over four years.
The recently announced increase in defense spending will cost taxpayers an additional $14 billion, and natural disasters, including the effects of Hurricane Koji and Hurricane Alfred, will take a $2.5 billion hit to the budget.
Promising that the budget would include packages covering taxes, savings and productivity, Chalmers said he and Gallagher had made room for spending in important areas.
“Since coming to government, we have transformed the budget by more than $200 billion, turned two deficits into two surpluses and paid off the Liberal Party’s $176 billion debt, but we recognize that the work is not done yet,” he said.
“Responsible economic management and restraint of spending are the defining characteristics of this Albanian government, and these will also define the features of the budget, which will be vital in the context of significant and inevitable spending pressures.”
The war in Iran and Australia’s rise in inflation, which hit a three-year high of 4.6 per cent this week, are also putting pressure on the budget interest bill, which is forecast to reach $33.1 billion in 2026-27.
Government debt interest rates, which are expected to be 4.4 percent on average in the next 10 years, have increased in the last three months. Chalmers is expected to confirm that gross debt of $966 billion will exceed $1 trillion in the next financial year.
This debt will increase the country’s interest bill along with the increase in interest rates.
“The conflict in the Middle East also means higher inflation, which will be reflected in higher borrowing costs and higher payment costs for the debts we inherit, which will hit the budget hard,” Chalmers said.
But shadow treasurer Tim Wilson said the inflation problems hurting the budget were largely due to Chalmers’ management of the budget.
“If Jim Chalmers had taken inflation seriously, stopped his active inflation agenda and stopped pouring debt oil on the inflation fire, Australia would not have the highest inflation of any major developed economy. When Iran declines, Australia’s inflation problem will continue,” he said.
Chalmers is expected to announce changes to capital gains tax, negative taxation and business taxes as part of the government’s effort to tackle what it describes as “generational inequality”.
On Friday Prime Minister Anthony Albanese said tax changes should aim to encourage aspirations such as people’s right to own a home.
“The reality is that many young people right now feel like they don’t have enough of a chance to own their own home,” he said.
“Once people see what we’re actually going to do in the budget, they’ll be able to make their own assessment. But I can assure you that this budget is absolutely and directly on target.”
Earlier this year, independent MP Allegra Spending published her own tax report supporting an overhaul of capital gains tax and negative gearing.
He said on Friday Chalmers must ensure any reforms include transitional arrangements to ensure existing tax benefits are not preserved to the detriment of new investors.
He said any changes would have to direct the extra revenue toward personal income tax deductions.
“Tax reform is politically difficult and I am pleased that the government is seriously considering changes as part of its budget agenda,” he said.
“But transitional arrangements and income tax relief for working Australians will ultimately determine the intergenerational equity of these reforms.”
The Australian Economic Development Committee said the budget must show a “renewed and credible commitment” to fiscal discipline and include policies that increase productivity while also improving the country’s economic security and resilience.
It was stated that as long as expenditures exceed revenues, debts will only accumulate as interest payments take a larger share of government finances.
“Where spending is directed also matters. Recent years have seen most spending directed towards consumption rather than investing in building productive capacity that can help the economy grow over time and pay off our debt,” he said.
“Then come budget night, CEDA will expect the government to fulfill its promise to introduce savings and tax packages that increase overall profits.”
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
