It’s official, Jim Chalmers has not managed the budgetary equivalent of a “three-peat”.
After delivering two straight surpluses, Monday’s final budget outcome confirmed the country’s finances slumped to a deficit of $10bn in 2024-25.
A small and expected deficit for the recent financial year is no disaster, but nor is it great news.
So why were Chalmers and Katy Gallagher, the finance minister, doing a victory lap on Monday, trumpeting the government’s “responsible economic management”?
Because it could have been worse.
The pre-election economic and fiscal outlook forecast a deficit of $27.9bn in 2024-25.
Which means the final budget outcome for the last financial year has come in about $18bn better than anticipated, thanks in large part to a much bigger than anticipated tax take from workers and companies.
Sign up: AU Breaking News email
Which is good.
But Gallagher went even further, boasting to journalists that the budget was “getting in better shape”, and that “it means we’re able to lower the debt” and “we’ve lowered the interest bill on that debt”.
None of those three statements is true.
The budget is not “getting in better shape”, unless you reckon shifting from a surplus to a deficit – with an even wider deficit predicted for this financial year – is an improvement.
Meanwhile, debt is climbing, not falling, as is the interest we have to pay on that debt.
In fact, interest payments are the fastest growing major payment in the budget, at an estimated annual average of 9.5% over the coming decade.
Luckily, while the government spin may be out of control, the budget isn’t.
As Chalmers has been keen to point out, most other similar countries would love to be in our position.
A small deficit worth 0.4% of GDP looks fantastic when compared with the United States’ extraordinary deficit worth 6.4% of its economy.
The same is true for our debt burden, which, while expanding, is equivalent to 50% of GDP, including the states and territories.
In contrast, the average among the G20 countries is over 100%.
But is it enough to be the best of a bad lot?
Luke Yeaman, CBA’s chief economist and a former deputy Treasury secretary, says “right now we have a strong fiscal position”.
“We have a AAA credit rating and the government has delivered two surpluses and now a reasonably small deficit,” Yeaman says.
He agrees that this strong position looks even better when compared with other similar economies.
But he says the international comparison should serve as both a comfort for today, and a warning for tomorrow.
“It is the boiling frog,” he says.
“There is still at the heart of the budget a structural challenge that is not being met. And the people who will bear the consequences will be future generations.”
That structural challenge involves climbing spending commitments that have to be met with an ever-rising tax take, the burden of which increasingly falls on younger workers.
The budget predicts that the deficit dwindles away to nearly zero over the coming decade.
But that budget repair only happens because workers pay a steadily higher average share of their wages on income tax, in a phenomenon known as “bracket creep”.
A recent analysis by the Parliamentary Budget Office shows that to eventually balance the books, the average worker’s tax rate will rise from 25% now to 27% by the mid-2030s.
Assuming no further tax relief, total personal income tax as a share of overall government revenue will climb from 48% to 53% over the coming decade.
This government or future ones will have to grapple with telling voters they need to accept higher taxes or lower spending on services, Yeaman says.
“Ultimately there’s a choice to be made.”
