Australia sees wider budget deficits ahead as election looms

Australia’s budget is expected to slip deeper into deficit in the years ahead due to rising government spending and a weakening in key trade partner China, a mid-year fiscal update showed, with a national election due in less than six months.

While the budget shortfall is forecast to narrow slightly in the current fiscal year to A$26.9 billion (S$22.9 billion), it then widens to A$46.9 billion in 2025-26, or 1.6 per cent of gross domestic product, and holds at or above 1 per cent of GDP in the following two years, according to the Mid-Year Economic and Fiscal Outlook released on Dec 18. 

The anticipated deterioration in the books is a blow to Treasurer Jim Chalmers, who has sought to construct a Labor government narrative of sound economic management ahead of an election that must be held by May 17. 

The Treasury has also edged down expectations for economic growth this fiscal year and the next as elevated interest rates drag on private-sector activity.

“The market was pretty well prepped for the wider deficit scenario and this came within expectations,” said Mr Damien McColough, head of fixed income research at Westpac Banking Corporation in Sydney.

“Given there was some risk of an election-style big spending shift, there is probably some relief that the worst-case scenario did not eventuate.”

Having delivered back-to-back surpluses in his first two budgets, the first in almost two decades, increased outlays and a weaker Chinese economy have now hurt the bottom line for Mr Chalmers. 

With payments expected to rise faster than previously forecast, net debt is now seen climbing to 22.4 per cent of GDP in 2027-28, compared with a May estimate of 21.9 per cent. 

“Australia’s structural budget deficit is the result of years of successive governments neglecting the economic and tax reform needed to create a more prosperous Australia,” said Ms Cathryn Lee, a partner at Deloitte Access Economics.

“Significant economic and tax reform is the only way to stabilise Australia’s fiscal position.”

Opinion polls show voters are increasingly frustrated by the nation’s economic position, with interest rates at a 13-year high of 4.35 per cent and prices still rising.

While the government has sought to cushion the blow with cost-of-living relief and tax cuts, electoral discontent persists.

Speaking in Canberra on Dec 18, Mr Chalmers dismissed suggestions that he should cut spending further. 

“It would be madness in economic terms, given how little growth there is in the economy right now, to slash and burn in the budget,” he said. “That would have been diabolical for an economy that is barely growing as it is.”

The wider deficit will also be a headache for the Reserve Bank of Australia (RBA) as it tries to cool domestic demand and consumer prices.

Economists have repeatedly said the strong fiscal impulse is a key reason the central bank has resisted joining a global easing cycle.

Money market pricing implies a first cut will occur only in April or May.

High levels of post-pandemic immigration are expected to be a major factor in the 2025 election, with the budget update showing the government missed its target to reduce net arrivals by a substantial margin. 

Estimates for net overseas migration this fiscal year were revised up to 340,000 from the 260,000 forecast in May. It is then predicted to slow, helped in part by the government’s clampdown on international students.

China’s slowing economy is another area of concern for Australia, which exports over 80 per cent of its iron ore to the Asian giant.

The budget update showed the Treasury maintaining a conservative stance, forecasting the iron ore price to drop to US$60 a tonne by September 2025, well below the current price of around US$100.

For the domestic outlook, the Treasury sees headline inflation remaining within the RBA’s 2 to 3 per cent target, reflecting energy rebates and other subsidies.

The central bank is instead focusing on core inflation, which is currently running at 3.5 per cent and is not expected to fall back within the band until late 2025. 

Unemployment, which has remained very low despite high interest rates, is predicted to climb to 4.5 per cent by June 2025, from 3.9 per cent in November. The labour market has been one of the government’s strongest metrics.

“We are trying to manage a soft landing on a bumpy runway,” Mr Chalmers told reporters in Canberra.

“We know that the global economic environment is very difficult, we know that people are still under cost-of-living pressure, we know that interest rates are still having an impact on the economy.” BLOOMBERG