Australia’s federal budget is on-track for a deficit of $26.9bn this financial year and is not projected to return to balance until 2034-35, according to the midyear economic update (Myefo).
On Wednesday the treasurer, Jim Chalmers, and the finance minister, Katy Gallagher, released the update, which breaks Labor’s streak of two full-year budget surpluses with a deficit in its third year, albeit one that is $1.3bn smaller than projected in May.
Chalmers and Gallagher said the result is “almost half the $47.1bn deficit we inherited for this year from our predecessors”.
The economic statement sets the scene for a 2025 election in which Labor’s economic management during high global inflation and both major parties’ plans for future cost-of-living relief will be central issues.
On Wednesday, Chalmers played down the prospect of further cost-of-living relief. He said the government would “do more … if we can afford to”, but noted the $5.5bn in the decisions taken but not announced category – which can hide pre-election sweeteners – was “relatively small”.
Cumulatively, deficits are $22bn worse over four years, with the deficit projected to increase to $46.9bn in 2025-26, or 1.6% of gross domestic product (GDP), before falling to $38.4bn in 2026-27 and $31.7bn in 2027-28, back down to a deficit of 1% of GDP.
But the midyear update said Australia’s budget deficits are better as a share of the economy in every year over the medium term than the pre-election fiscal outlook, the position inherited from the Coalition when Labor was elected in May 2022.
“The underlying cash balance is projected to improve over the medium term, returning to balance by 2034–35,” it said.
“Gross debt is expected to stabilise at 36.7% of GDP at 30 June 2027, before declining to 31.4% of GDP by 30 June 2035.”
Chalmers said the government had ignored “free advice” from commentators and political opponents “that we should slash and burn and have some kind of austerity budgets”, arguing that “would have been diabolical for an economy that is barely growing as it is”.
Economic growth in Australia is expected to increase from 1.4% in 2023–24 to 1.75% in 2024–25, and then 2.25% in 2025–26.
However, this is a downgrade on projections contained in May’s budget, which forecast growth of 1.75% in 2023-24, then 2% in 2024-25.
The update said that “the impact of higher interest rates, cost-of-living pressures and global economic uncertainty has weighed on the Australian economy more than anticipated”.
Chalmers and Gallagher said that “despite the pressures coming at us, we’re on track for a soft landing and our budget strategy is helping”.
“Our economy is growing, inflation is moderating, real wages are growing, unemployment is low, more than one million new jobs have been created, we’re rolling out tax cuts and cost-of-living help to help people doing it tough, and there’s now much less debt than when we came to office.”
Although prices rose by 3.8% in 2023-24, higher than the 3.5% projected in May, inflation projections are largely unchanged since the May budget. Both the midyear statement and budget project inflation of 2.75% for the next two years.
By contrast, the Reserve Bank projects that headline inflation will increase above 3% for some quarters in 2025-26. Chalmers said the difference was largely “timing” and the price of petrol, not because treasury was accounting for a further round of electricity price relief.
Inflation returned to the RBA’s target band for the first time since 2021 in the September quarter 2024, the update said.
“This was supported by the government’s cost-of-living relief in the 2024–25 budget, which is expected to directly reduce annual inflation by 0.5% of a percentage point in 2024–25.”
The midyear update is pessimistic about the prospects of unemployment remaining low, suggesting that despite an unemployment rate of just 3.9% in November that the proportion of jobless Australians will rise to 4.5% in June.
The midyear update also revised up the rate of net overseas migration from 260,000 projected in the budget to 340,000, in line with experts’ expectations due to sluggish growth in departures even while the rate of arrivals slows.
The update reveals a total of $5.5bn spending over four years in “decisions taken but not yet announced” and measures for which the cost is “not for publication”.
Commonly used as an inexact metric for the size of an unspent election war-chest, the figure includes confidential sums paid for Aukus nuclear submarines and an undisclosed sum for “enabling a reliable and secure energy transition”.
The update reveals the government will provide additional funding of $1.2bn over six years from 2024–25 for the energy grid through recapitalising the Rewiring the Nation program.
The update reveals that in addition to increasing fees for international student fees in July, the government will also increase the visa application charge for temporary graduate visas by 14.75% from 1 February 2025, estimated to increase receipts by $1.7bn over five years.
Before of the release, Labor boasted that it has improved the budget by a cumulative $200bn over the six years to 2027-28 inherited from the Coalition, despite $8.8bn of “unavoidable spending” in the mid-year update and $16.3bn in changes to payments and programs.
Chalmers and Gallagher said the government had done so by returning “78% of upwards revisions to revenue since the election, compared to our predecessors who averaged around 40%”.
“Average real spending growth will be 1.5% over the six years to 2027‑28, which is less than half the 30-year average and around a third of our predecessors.”
