Government deficit lower than expected as commodities, jobs bolster revenue
Billions of dollars have been erased from the budget deficit and government debt thanks to the continued strength of commodity prices and the country’s job market, but consumers face further pain as the war against Iran risks a new rise in gasoline prices above $2 per liter.
Weeks after Chancellor of the Exchequer Jim Chalmers announced a budget in which he predicted the just-completed financial year would show a deficit of $28.3 billion, the Treasury believes that budget will be closer to $23 billion.
This is well below the $49.6 billion deficit Chalmers predicted for 2025-26 when he announced his first budget in October 2022.
Despite the improvement, the deficit remains a significant increase over the $10 billion deficit recorded in 2024-25 and a modest improvement over the $31.5 billion deficit forecast for the current fiscal year.
The better budget deficit contributed to a smaller amount of government debt than expected. Gross debt ended the fiscal year at $971.4 billion, about $10 billion lower than the budget estimate.
But the budget will need to improve significantly to prevent gross debt from exceeding $1 trillion this fiscal year, as expected.
Chalmers praised the deficit reduction, saying the government had saved money on upward revisions to revenue collections.
“This improvement in results is another strong demonstration of our responsible economic management,” he said.
“We’re finding savings, we’re making upward revisions to revenue, we’re restricting spending and we’re addressing structural pressures on the budget, and all of that is making a meaningful difference.”
But Opposition Leader Angus Taylor said the government had plunged Australia into an economic crisis with the biggest collapse in living standards in the developed world.
“This is the ability to pay for the things that people are used to buying with their pay packets. The purchasing power of their pay packets has declined faster than any other developed country in the world,” he said.
The improved state of the budget may be disrupted by the resumption of hostilities between the United States and Iran.
The price of Brent crude oil, which dropped to US$71.80 ($102.70) per barrel at the beginning of the month, rose back above US$90 per barrel on Monday.
Movements in the Strait of Hormuz, which had approached pre-war levels just two weeks ago, have collapsed and analysts suggest the key waterway is now effectively closed. The Islamic Revolutionary Guard Corps claimed that two oil tankers exploded in the strait on Monday.
The elevator is starting to affect oil prices across the country.
The average metropolitan price of unleaded petrol reached 171.6 cents per liter last week, an increase of 4 cents over the past seven days, the Australian Petroleum Institute said on Monday.
Since the beginning of the month, the price of unleaded oil has increased by 15.1¢ per liter.
This includes halving the federal government’s fuel tax rebate, which suggests oil prices will continue to rise for the rest of the month. The government’s consumption tax reduction will end on August 2.
NAB senior economist Taylor Nugent said the rise in Brent crude occurred as consumption duty returned to pre-war levels.
Unless there is rapid change in the global energy market, retail oil prices will rise above $2 a liter “within a few weeks,” he said.
Unleaded petrol costs about $1.70 a liter in Sydney and Melbourne. The last time it rose above $2 per liter was in mid-April, after peaking at $2.50 per liter in late March when the Strait of Hormuz was closed for almost a month.
Nugent said the rise in oil prices would be a complication for the Central Bank at its next meeting on August 10 and 11. Financial markets predict that the probability of an interest rate increase at next month’s meeting is less than one in five.
“We continue to expect the RBA to remain on hold as rising inflation risks, driven by higher interest rates and a housing market slowdown reflected in activity, are offset by a below-trend growth outlook,” he said.
“But last week’s high oil and refined product prices are a reminder that inflation risks remain high.”
It’s not just about oil prices. LNG prices have risen to almost US$21 per million British thermal units (MMBtu) due to concerns that access to gas from the Middle East will be restricted due to escalating conflicts. Before the war, the price of LNG was around 11.50 MMBtu.
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
