Australia’s grim economic outlook revealed
Written by admin on November 25, 2024
Australia’s budget is tipped to be nearly $50bn worse off as falling commodity prices hamper the government’s fiscal position.
The warning comes from Deloitte Access Economics which forecasts Australia’s budget deficit will balloon to $33.5bn in May 2025, compared to the official forecast of $28.3bn, as mining revenue subsides.
If realised, that would represent a deterioration in the budget bottom line of more than $49.3bn following the $15.8bn surplus in 2023-24.
Deloitte Access Economics partner and report co-author Stephen Smith said worryingly, there was little to suggest the situation would right itself in the years to come.
“That stunning turnaround in Australia’s fiscal fortunes would be the largest nominal contraction in the underlying cash balance on record, excluding the pandemic-hit budget of 2019-20.”
Treasurer Jim Chalmers said the report highlighted the current challenges on the Australian budget, which were only building since his budget in May this year.
“Our budget position in the mid-year update (in December) will be a bit weaker than what the Treasury forecast in May, but still much stronger than what we inherited,” he said.
“We’ve made a lot of progress in only two years – inflation is falling, real wages are growing, more than a million jobs have been created, we’ve overseen a $172bn budget turnaround and taken action to address the biggest structural pressures like interest costs, the NDIS and aged care.
“But it’s not mission accomplished because people are still under pressure.”
Budget black hole set to worsen
The Deloitte report further shows that regardless of which party wins the next election, Australia’s economic condition was likely to worsen.
“Over the last two decades both major political parties have fallen short of the standard of fiscal rectitude necessary to ensure the long-term health of the federal budget,” report co-author Cathryn Lee said.
“The structural budget position – that is, what the budget balance looks like after correcting for the swings and roundabouts of the economic cycle – is in deep deficit, meaning that without cyclically serendipitous commodity price booms, a surplus is out of reach.”
While the current government has pocketed more than $80bn in revenue upgrades over its four mid and full year budget outlooks, both parties have been bailed out by strong commodity prices.
Mr Smith said Australia’s poor longer-term outlook is well published by the intergenerational report, (IGR) which issued a grim outlook for Australia in the years to come.
“The latest IGR, published in 2023, noted the federal budget’s underlying cash balance is expected to deteriorate by almost 3 per cent as a share of the economy over the next four decades.”
Trade war starts at worst time for Australia
Australia’s long term financial position is only likely to be further hampered by the empathetic Donald Trump election victory.
The sweeping result for the Republicans where they won both the Presidency and Congress means the government will likely be able to pass through Mr Trump’s policies.
These include tariffs on all imports, including Australia, with Chinese goods facing up to 60 per cent higher prices.
While US markets have favourably looked to Trump’s policies as positive, Deloitte found the composition of the Australian economy means it will always be more exposed to global commodity prices than most other developed economies.
However, Ms Lee said Australia was taking some steps in the right direction.
“Recently announced aged care reforms and the new $900m National Productivity Fund both represent good policy, alongside the energy transition reforms that are underway,” she said.
“It’s also been great to hear the Treasurer talk more about Australia’s productivity challenge and the need for reform in recent speeches.”
But Deloitte pointed out there had been a lack of substantive economic reform in Australia over a period stretching more than two decades.
“That has resulted in a coddled and cosseted economy bereft of competitiveness and dynamism,” Ms Lee said.
“Economic and productivity growth are moribund and real incomes are declining, while income, wealth and intergenerational inequality has morphed into a broader schism through Australian society.”
