Australia’s economic outlook has taken a grim turn, with the federal budget deficit projected to hit a staggering $26.9 billion in the 2024-25 financial year. According to the mid-year economic and fiscal outlook (Myefo) released by Treasurer Jim Chalmers and Finance Minister Katy Gallagher, the nation’s balance sheet won’t return to surplus until 2034-35 – a stark downgrade from prior forecasts.
Budget Woes Persist Despite Improvement
While the projected deficit for this fiscal year is $1.3 billion less than anticipated in the May budget, it still marks the end of Labor’s two-year streak of budget surpluses. The government attributed the downgrade to the Australian economy being hit harder than expected by elevated interest rates, cost-of-living pressures, and global economic uncertainty.
Despite the pressures coming at us, we’re on track for a soft landing and our budget strategy is helping.
– Treasurer Jim Chalmers and Finance Minister Katy Gallagher
The Myefo update revealed that the deficit is set to worsen to $46.9 billion in 2025-26 before gradually improving in subsequent years. However, it will still hover at a substantial $31.7 billion by 2027-28.
Economic Growth Downgraded
Australia’s economic growth prospects have also been revised downward. GDP growth is now forecast at 1.4% for 2023-24, rising to 1.75% in 2024-25 and 2.25% the following year. These figures are notably lower than the projections in the May budget.
Treasury officials attributed the bleaker outlook to the compounding effects of elevated interest rates, cost-of-living strains, and an uncertain global economic environment weighing on the Australian economy more heavily than previously anticipated.
Inflationary Pressures Persist
While inflation returned to the Reserve Bank’s target band in September 2024 for the first time since 2021, price pressures are expected to linger. The Myefo projects inflation at 3.8% for 2023-24, higher than the 3.5% forecast in May.
The government’s cost-of-living relief measures introduced in the 2024-25 budget are expected to directly reduce annual inflation by 0.5 percentage points. However, the Reserve Bank holds a less optimistic view, projecting that headline inflation will exceed 3% in some quarters of 2025-26.
Unemployment to Rise Despite Record Low
Australia’s job market has been a bright spot, with unemployment at just 3.9% in November. However, the Myefo update suggests this may not last, forecasting the jobless rate to climb to 4.5% by June despite the current tightness in the labor market.
Boosting Energy Transition and Global Talent
Amid the fiscal challenges, the government has allocated additional funding to support Australia’s transition to renewable energy. The Myefo earmarks $1.2 billion over six years from 2024-25 to bolster transmission and distribution projects critical to the nation’s energy transformation.
In a bid to attract global talent, the government will increase the visa application charge for temporary graduate visas by 14.75% from February 2025. This move is estimated to boost receipts by $1.7 billion over five years.
Long Road to Surplus
The path back to budget surplus is projected to be a long and arduous one for Australia. Despite the government’s efforts to rein in spending and bolster revenues, a myriad of domestic and global economic headwinds continue to buffet the nation’s fiscal position.
The underlying cash balance is projected to improve over the medium term, returning to balance by 2034-35.
– Mid-Year Economic and Fiscal Outlook 2024-25
As Australia navigates this challenging economic landscape, the focus will be on the government’s ability to implement targeted policies that support growth, manage inflationary pressures, and cushion the impact of global uncertainties on businesses and households. The journey to budget repair is set to be a defining issue in the lead-up to the 2025 federal election.
