Hopes of wartime windfall shot down for federal budget
Australia will miss out on a budget windfall similar to Russia’s invasion of Ukraine; this year’s forecast is estimated to be only $3.6 billion better than previously thought.
Deloitte Access Economics partner Stephen Smith said Finance Minister Jim Chalmers had been able to rely on windfall revenues to plug the cracks in Australia’s precarious fiscal situation in previous years, but the budget’s luck had run out.
Inflation and higher commodity prices helped increase tax take by almost $100 billion in the 2023 budget, turning an expected $77 billion deficit into a $22 billion surplus despite clear policy decisions that left the budget in even worse shape.
The disturbing impact of the conflict on the other side of the world was less obvious this time; Negative effects on the Australian economy were also negatively affecting the budget.
Oil prices rose to their highest level since the beginning of the war on Thursday, and the fact that the blockade of the Strait of Hormuz is not expected to end increases the likelihood of the serious downward scenario prepared by the Treasury for the budget.
In Deloitte’s Budget Monitor, Mr Smith forecast a $33.2 billion deficit for 2025/26; This is a modest improvement from the $36.8 billion deficit projected in the December mid-year update.
“Economic developments that create a sugar hit on the revenue side will jeopardize the health of the budget elsewhere,” Mr. Smith said.
“A sustained oil supply shock could significantly slow demand, while the Reserve Bank of Australia may be forced to raise interest rates more than expected.”
He said tougher cost-of-living support, such as a three-month cut in fuel duty from early April, would support higher inflation and require a more aggressive response from the RBA.
Even without new support measures and bold efforts to limit spending growth on the NDIS, increased spending on existing programs is likely to offset much of the windfall.
Dr Chalmers warned against expecting large increases in the budget; In some years, revenues may decrease.
“Reform is urgent not despite, but because of global uncertainty,” he said.
“This budget will be adjusted to the economic conditions we face in the global economy, to what is right for the time, and consistent with our ambitions and obligations for the future.”
Mr Smith said the ongoing structural deficit underlined the need for real reforms rather than short-term measures that would require political courage.
He said he would resist the urge to grandfather existing assets amid negative gearing and changes to reduce capital gains tax concessions.
A better option would be to gradually implement changes overall, which would bring in more revenue and avoid creating a two-tier system.
In a podcast interview on Thursday, Dr. Chalmers hinted that tax regulations for existing asset owners would remain unchanged.
“Without making assumptions about policies, what you’re trying to do is make sure we recognize the decisions people have made in the past,” he told Commonwealth Bank chief economist Luke Yeaman.
Mr. Yeaman also expected the budget windfall to be smaller than in previous years, but gave a slightly smaller forecast of a $29 billion deficit.
