Treasurer Jim Chalmers: Budget deficit hits $27b: Spending, higher indexing to blow out 2025/26 Budget to $50b

Treasury forecasts the full year Budget will record a deficit of $26.9 billion, $1.3 billion better off than originally forecast in May, but new spending and higher indexed payments are expected to blow out next year’s Budget to a deficit of almost $50b.

The Mid-Year Economic and Fiscal Outlook (MYEFO) confirms the end of consecutive surpluses, but Labor is expected to highlight the improved deficit as evidence of fiscal responsibility.

“These figures show an improvement in the bottom line for this year since the Budget, and a big improvement to the bottom line since the election,” Treasurer Jim Chalmers said.

“The deficit for this year is now $1.3b smaller in this Budget update, and almost half the $47.1b deficit we inherited for this year from our predecessors.

“The Albanese Labor Government has delivered the biggest-ever Budget turnaround in a parliamentary term due to a combination of limiting real spending growth, identifying savings and banking the majority of revenue upgrades since we came to office.”

The overall deficit is smaller than the $33.5b forecast by Deloitte Access Economics.

While the last four Budgets benefited from average revenue upgrades of $80b, this year’s company tax receipts have been revised down by $6.6b in 2024–25 and $8.5b over the forward estimates.

“For the first time since the 2020–21 Budget, company tax receipts have been revised downwards, reflecting weaker commodity volumes amid emerging challenges in the Chinese economy,” the Budget papers said.

Individual taxpayers will be slugged an extra $8.7 billion in 2024–25 and $21.5 billion over the four years to 2027–28, due to higher employment and wages.

MYEFO shows a deterioration in both deficits and government debt over the next four years. Deficits are projected to increase by $23.2b to 2027–28, a 25 per cent rise, driven by $4.4b in additional payments and $32b in new spending.

The deficit is expected to widen by $4.1b next year, peaking at $46.9b in 2025–26 (1.6 per cent of GDP), before moderating. Treasury assumes GDP growth will reach at least 2.75 per cent between by 2028.

Among the new spending initiatives are an extra $3.6b for wages for early childcare workers, $2.5b for new drugs on the Pharmaceutical Benefits Scheme, and $1b for the energy transition.

A further $25b in previously unbudgeted spending over the next five years will come from “payments from parameter and other variations,” including $9.5b for wage rises for aged care workers, $4b for age pension indexation, and $3.7b for an anticipated uplift in childcare subsidies due to increased demand.

Dr Chalmers defended the additional payments as essential for cost-of-living relief and dismissed claims they would fuel inflation.

“A lot of this spending is pressure that no responsible government could deny. We’re talking about extra kids enrolled in early childhood education. We’re talking here about indexation of the age pension. We’re talking about strengthening Medicare,” Dr Chalmers said.

“So when our opponents say that there is too much spending they should nominate which of this spending on Medicare or medicines or pensions do they think is inappropriate. It would be madness, not just in fairness terms, but it would be madness in economic terms, given how little growth there is in the economy right now to slash and burn the Budget.”

Gross government debt is now forecast to hit $1 trillion next year and grow $49b higher over the forward estimates, reaching 36.7 per cent of GDP by 2027–28, up from 34 per cent this year. As a percentage of GDP, it remains less than half the debt levels of most advanced economies, which average 105 per cent of GDP.

Debt remains 8.2 percentage points lower than its 2022 Pre-Election Fiscal Outlook peak.

“The Budget is still $200b stronger than what we inherited,” Dr Chalmers told Sky News.

“That $200b improvement in the Budget since we were elected means $177b less debt and $70b less interest on that debt.”

According to the Budget papers however, interest payment on debt will be the largest single drain on the Budget over the next ten years, expected to grow by 11 per cent annually. The next highest spend is the NDIS, which is forecast to grow more than 8 per cent annually, with defence and hospitals growing more than 6 per cent annually through to 2035-35.