Australia’s federal budget is set for a post-lockdown bounce before settling into deficits of $60bn a year due to higher social services and defence spending, an independent analysis has warned.
Deloitte Access Economics’ budget monitor, released on Tuesday, projects cumulative deficits will be $45bn lower than expected over the next four years as momentum built before the Delta wave is unleashed through a sustained recovery in a highly vaccinated society.
But in 2024-25 the deficit will be at least $36bn on announced policies and it’s tipped to reach $60bn including $25bn of new spending not yet announced.
The federal government will then have an “ongoing shortfall” so large it would require interventions as drastic as raising the GST to 17% or raising marginal income tax rates by 5.5% to wipe out the deficit.
The report calls into question the sustainability of stage three income tax cuts – which flatten the tax rate to 30% for all workers earning between $45,000 and $200,000 – supported by both the Coalition and Labor.
Deloitte forecasts the budget deficit will shrink from $116bn in 2021-22 to $49bn in 2024-25 because “when nations get sufficiently ahead of Covid for their economies to open up, their tax revenues go on a tear”.
In the medium and long term, Australia’s budget will be in deficit – not because of Covid spending measures, as the cost of servicing Australia’s debt actually decreased due to low interest rates – but due to baked-in spending.
The May budget added $15bn a year to ongoing spending on social services, with large investments in disability, mental health and aged care, in part to rectify historical underspending identified by the royal commission.
Deloitte warned of “a fast widening gap between what experts expect the NDIS to cost and what’s budgeted for it”, a gap also noted by the government services minister, Linda Reynolds, who has suggested “hard discussions” will be needed to make the scheme sustainable.
The fastest-growing budget item, defence, is expected to continue to grow as the Aukus pact responds to dangers in the Indo-Pacific region with higher spending.
Australia will also have almost one million fewer people due to Covid border closures, Deloitte projected, which will weigh on the budget.
Deloitte warned that income tax cuts to battle bracket creep are “overdelivering” because “bracket creep is driven by wage growth, but that’s slumped to record lows”.
“Worse still, the national debate on these tax cuts focussed on fairness, whereas the problem with these tax cuts was always their size,” it said.
“So just when we should be turning our minds to how to pay for higher social and defence spending, we’ll deliver a tax cut that’s too big.”
Deloitte Access Economics partner Chris Richardson told Guardian Australia that the nation didn’t “need fiscal repair any time soon” because the top priority was to “repair the economy”.
Richardson said stage three tax cuts, set to take effect in 2024-25, and how to finance the deficit if they proceeded, were “the story of the next election”.
“Do not let either side of politics hide from the difficult questions … there are no easy answers … important decisions need to be made and they won’t be fun.”
There is disquiet within the Morrison government’s own ranks about the size of programs to combat the Covid recession including the $90bn jobkeeper wage subsidy scheme, which Deloitte said could have been better targeted but played a “starring role” in supporting the economy.
In September 2020 the treasurer, Josh Frydenberg, signalled the Coalition will continue to prioritise reducing the unemployment rate ahead of debt reduction, promising that it will not begin the work of substantial debt and deficit reduction until the unemployment rate was “comfortably” back under 6%.
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Labor, burned at the 2019 election for proposing wide-ranging tax changes to franking credits, negative gearing and capital gains tax has ditched all these revenue-raising measures and promised not to scrap the stage three tax cuts.
Frydenberg said the monitor was “a further vote of confidence in Australia’s economic resilience” and showed “temporary, targeted and proportionate economic support has underpinned our strong economic recovery”.
“Lower taxes and investment in skills and infrastructure will continue to support the economy as we recover from the biggest economic shock since the Great Depression,” the treasurer said.
Labor’s shadow treasurer, Jim Chalmers, said the budget monitor “confirms the significant challenges Australians face” and that improvements in the near term were “despite the Morrison government not because of it”.
“This government has promised eight surpluses but delivered none, real wages are going backwards, and year after year its budgets have been weighed down by waste and riddled with rorts,” he said.
