Source : Perth Now news
Australia’s national debt has likely fallen due to surging cost-of-living and the war in Iran, but economists warn the country’s luck is running out.
According to Deloitte Australia, fiscal policy has been held together by “sugar hits” of inflation and strong commodity prices, with real reform needed over short-term support to ease the pain at the petrol pump.
Since April, motorists have saved on average 32 cents per litre due to a halving of the fuel excise and returning the GST windfall.
Deloitte Access Economics partner Stephen Smith warned Australia could not rely on foreign events to continue to prop up the budget.
“Higher inflation and the conflict in the Middle East, that is all quite good for the budget because higher prices means more tax revenue,” he told NewsWire.
Mr Smith said the budget had been structurally flawed for a number of years, with surprising revenue increases papering over Australia’s “precarious fiscal position”.
“Economic developments that deliver sugar hits on the revenue side will jeopardise the budget’s health elsewhere,” he said.
“A sustained oil supply shock could substantially slow demand, while the Reserve Bank of Australia may have to hike interest rates further than anticipated.
“That risk will be more certain of becoming a reality if there is heavy-handed support for households in the budget.”
Australia’s Cash Rate 2022
According to Deloitte Access Economics budget monitor report, the underlying cash deficit will come in at $33.2bn or a $3.6bn improvement on the Mid-Year Economics and Fiscal Outlook (MYEFO).
Mr Smith said higher inflation would lift revenue for the national coffers for the next two years.
Commonwealth Bank is more optimistic, forecasting a “significant improvement” in the fiscal outlook, as the deficit drops to $29bn this year and $22bn the year after.
In total, the Australian Office of Financial Management shows the country still owes $962.6bn, after the country paid back a $40bn tranche of the debt on April 21, 2026.
Costs will rise
Deloitte warns Australia’s elevated inflation will lift indexed cost payments, including jobseekers and the pension, while the government will have to pay more on public debt.
“Even with a relatively disciplined approach to new spending, the increased cost of existing spending is likely to offset a large part of the budget’s revenue windfalls,” Mr Smith said.
“The ‘fast five’ spending areas – defence, the NDIS, aged care, health and interest costs – are all essential, but their growth is outpacing revenue at an unsustainable rate.”
Health Minister Mark Butler has previously announced changing the rules for the national disability insurance scheme to reign in the runaway costs.
New legislation is due to be put before parliament to target “scheme inflation” and crack down on eligibility requirements and alleged rorting of the scheme.
These changes would result in taxpayers spending about $55bn over forward estimates, instead of the NDIS costing more than $70bn in 2030, as current projections show.
Competing priorities
According to Commonwealth Bank chief economist Luke Yeaman, the budget faces three main issues that the government needs to address.
These include changing the tax system to create a “fairer” burden between the generations while also improving priorities.
The second is the economy is growing faster than expected and any increase in government spending will only add fuel to the inflation fire.
At the same time, the Iran war has created significant uncertainty and challenges.
“Achieving all of this in one budget (major reform, big spending cuts, national resilience and supporting households) is quite the ask,” he said.
“We expect the government to try to thread the needle. To pull this off, they will need to meet several tests.”
In recent weeks, Treasurer Jim Chalmers has gone as far as describing the budget strategy as “hostage to economic turmoil”.
He has promised it will remain ambitious while delivering “substantial savings”.
The Treasurer has also pledged the budget will focus on “intergenerational inequity” issues in the taxation and housing sectors.
Here’s what we know about the federal budget so far.
Go big or go home
Part of the tax reform begins by removing the sacred cow of rejigging the capital gains tax discount and negative gearing.
Currently, there is a flat 50 per cent discount that applies to capital gains across all asset classes when held for greater than one year.
This means if an investor buys a property for say $500,000 and it increases over two years to $700,000, the capital gain is $200,000.
But the investor would only pay taxes on $100,000 of this money due to the changes.
Instead, reports have emerged the government will change this to indexation, meaning the investor only pays gains on the “real capital gain”.
“The stars have finally aligned for long‑touted reforms to the CGT discount and negative gearing, with the Government seeking to frame this as a housing and intergenerational equity issue, not a ‘tax grab’,” Mr Yeaman said.
Commonwealth Bank predicts this will save the budget about $2bn over four years, if the current reports prove true.
While calling changes to capital gains tax a decent start, Deloitte believes the budget should go a step further, moving away from a reliance on income, to broader consumption and land taxes.
Deloitte Access Economics said this could be done by lifting the tax-free threshold to $35,000, a 33 per cent marginal rate on all incomes up to $300,000 and a to 40 per cent on all incomes above this threshold.
“From an economics point of view if you are taxing income you are discouraging people from working, so the less we can tax labour the more we encourage people to work and that can really boost the economy,” he said.
“Over the last few decades the structure of the economy has changed a little bit, as we have a much older population on average and have people who are relatively wealthy who are no longer working.
“So when we have higher taxes on income that is falling disproportionately on younger people while people with a lot of wealth are paying proportionally less tax.”
He also told NewsWire taxes such as the GST were more efficient because everyone consumed, meaning everyone would pay the tax.
