Debt and deficit shrink amid tax revenue surge
The total collapse in excise tax estimates since 2018-19, when changes in excise duty collections were expected to increase tax collections by a third, has now reached $50 billion.
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In his final budget for early 2022, Josh Frydenberg predicts tobacco excise duty will raise $13.6 billion in revenue this financial year. Chalmers currently expects this figure to be $5.5 billion, a 20-year low, before falling to $4.4 billion in 2028-29.
The collapse is so great that last year’s budget would have nearly been in surplus if there had been no tobacco tax deficit.
The treasurer has rejected calls from some experts for the government to cut cigarette tax to help reduce the incentive for organized criminals to sell non-consumable cigarettes.
But he signaled that more aid would be available soon, as well as $350 million in extra funding for adaptation programs.
“We recognize that we will need to do more than the $350 million we provide to law enforcement. [Home Affairs Minister Tony] “Burke and others,” he said.
Government policy changes caused the budget to be $1.9 billion worse this financial year, but this was offset by an extra $7.3 billion from a stronger-than-expected economy. Over the next four years, government policy increased the budget by $2.2 billion.
However, this improvement will not turn into a budget surplus in the near future. The government still predicts the budget deficit will continue until 2035-36.
EY senior economist Paula Gadsby said the figures showed spending rising faster than expected over the next four years, leaving the budget in the red.
“Australian governments collectively have a spending problem, not a revenue problem. Failure to bring expenditure and income back into balance means higher debt burdens and less flexibility to deal with future problems,” he said.
Gross debt was expected to reach $1.02 trillion in March, but the update predicts it will be $993 billion by the end of 2025-26.
Lower debt has saved $816 million in interest payments this financial year, with $1.7 billion expected by 2028-29.
Public expenditures as a share of the economy were slightly lower than expected at 26.9 percent. Apart from the pandemic, it is the highest share the economy has received since 1986-87.
The share of government revenue in the economy was revised from 25.5 percent to 25.7 percent; this is just 0.1 point lower than that recorded in 2024-25.
Savings of $770 million this year and $3.4 billion in the next four years are expected from under-estimated payments made through the fuel tax credit system.
Other savings include changes to the government’s home battery program worth $6.7 billion on forward estimates, external workforce and travel cuts ($6.8 billion), updating expected returns on retiree-held assets ($1.9 billion) and re-profiling payments from the Housing Australia Future Fund ($743 million).
The share of government revenue in the economy was revised from 25.5 percent to 25.7 percent; this is just 0.1 point lower than that recorded in 2024-25.
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The update revealed extra spending, including support for Glencore’s Mount Isa copper smelter and Whyalla steelworks ($491 million) and revamped pension changes targeting low earners ($476 million).
The CSIRO, which announced the layoff of nearly 350 research staff last month, has been paid an extra $233 million for this year and next.
Pradeep Philip, lead partner at Deloitte Access Economics, said the government’s focus should now be on the May budget; Chalmers has already signaled that this will lead to a series of productivity-enhancing reforms.
“Mid-year update shows the government needs to create more space in the May budget to make it more sustainable and deal with looming risks [from geopolitical shifts] and unforeseen circumstances,” he said.
“Defense spending, national security and cyber security are of great importance.”
The Treasury lowered economic growth expectations for the next fiscal year, reducing GDP from 2.5 percent to 2.25 percent.
It sharply raised inflation expectations from 3 percent to 3.75 percent for 2025-26, then lowered it to 2.75 percent in mid-2027.
High inflation means the Treasury expects real wage growth, which has been positive for almost two years, to start heading backwards this year and next.
