The fleeting surplus and the looming deficit
The Australian government has achieved back-to-back budget surpluses for the first time in nearly two decades. However, these surpluses are projected to be short-lived, disappearing as early as next financial year and remaining absent until the middle of the next decade.
This temporary surplus is primarily attributed to "cyclical" factors, such as a strong economy with low unemployment, high commodity prices, and increased business profits. These factors lead to higher tax revenue and lower welfare payments. Additionally, high inflation boosts government receipts more than expenses due to income tax bracket creep.
However, the underlying reality is that the federal government has a "structural deficit," meaning it spends more than it collects in revenue when the economy operates at average levels. This structural deficit is primarily driven by rising interest rates, long-term fiscal challenges like climate change and an aging population, and increasing demand for care and support services.
Historically, the federal government has rarely achieved a structural surplus. The recent surpluses of 2020-21, 2021-22, and 2022-23, along with the balanced budgets of 2017-18 and 2018-19, are exceptions. However, the tax cuts implemented by the Morrison government in 2019 are projected to contribute significantly to the return of a structural deficit, accounting for at least two-thirds of the $28.3 billion deficit forecast for next financial year.
While the projected disappearance of the surplus may raise concerns, it's important to maintain a balanced perspective. Treasury forecasts indicate that the structural deficit will gradually shrink and virtually disappear by 2034-35. This projection relies heavily on bracket creep increasing the tax take from 25.2% to 26.2% of GDP over the next decade, while government spending is expected to rise only slightly from 26% to 26.3% of GDP.
If these projections hold true, total federal government debt would peak at 35.2% of GDP in June 2027 before declining to 30.2% by June 2035. This decline would be driven by economic growth outpacing additional borrowing, keeping Australia's government debt levels among the lowest among advanced economies.
This positive outlook is crucial, considering Australia's private debt levels remain among the highest globally. Maintaining a healthy balance between government spending and revenue is essential for ensuring long-term economic stability and managing the nation's debt burden responsibly.