The government has pitched this pre-election budget as a reminder to voters of its actions over its first term, namely – power cost relief, income tax cuts for all, student debt relief and Medicare payments.  

In total, the new spending commitments totalled $36 billion, with this funded via a change in Treasury forecasts (an $8 billion uplift in revenues and a $26 billion fall in costs) over the four-year estimates. Overall, the budget does not deliver much in the way of meaningful reform with the focus of wealth redistribution; given an election is days away from being called, this is unsurprising.  

What is more interesting is the longer-term position of the budget. After three years of extraordinarily favourable cyclical factors (light green bars) from higher commodity royalties and income tax receipts, a clearer picture of the issues facing Australia’s budget is now emerging.  

It is a picture of persistent, continuing deficits, a structural budget deficit that is depicted in the chart below. Whilst the deficits are forecast to narrow in the medium term (2030-2036), this is reliant on both favourable economic assumptions from Treasury and uncharacteristic spending restraint by government. In our view, without the occasional cyclical windfall, Australia’s days of budget surpluses are numbered.  

At the start of this century, the rivers of gold from the mining boom enabled the Howard government to reduce government gross debt to below 10% on the eve of the GFC. This enviable starting position has allowed successive federal governments to run budget deficits, with our Gross Debt to GDP increasing to 33.7% in 2024/25. This is a level of debt that is on par with other smaller developed countries (New Zealand, Korea, Norway, The Netherlands) but significantly lower than the G20 average of over 100%.  

Running a budget deficit is not necessarily a sign of bad economic management, particularly if the size of the deficit is lower than GDP growth so that the ratio of Debt to GDP remains unchanged. Yet, there can be good and bad deficits. A good deficit adds to the capital stock of the country and enables improved productivity in the long-term. A budget that is in deficit due to growing social payments is a bad deficit, as it is both difficult to unwind and limited in its future positive impact.  

Sadly, Australia’s direction of travel is heading towards bad deficits. This budget favours payments over policy; an energy cost rebate may provide a sugar hit in the polls but does not address the underlying problem of rising energy cost. With struggling productivity growth in Australia and significant spending on energy supply and transmission required under either major party, managing social spending to enable ‘good’ deficits will be the marker of good government. 

As has become the norm, there were very few surprises in this year’s budget with energy rebates, student debt, health spending and social support announcements having already been made before Tuesday night. The one exception being a surprise tax cut – very modest in size but no doubt will feature heavily in the pre-election narrative. 

Heralded as cost-of-living relief, this short-term ‘fix’ will be eroded by the longer-term issue of bracket creep. 

Move on folks, nothing to see here…  

Last year we wrote that small business owners would be bitterly disappointed with the 2024 budget. This year, it is even worse; a budget that is devoid of any meaningful assistance to the circa 2.5 million small businesses in the country. 

As partners in your investment journey, we monitor, examine, and navigate change. The Federal Budget is one such factor in our highly considered investment strategy and wealth management process. 

For more information on our approach to wealth strategy and investment management, please contact us on +613 9655 5000 or contact our experts here.