Words by Professor Richard Holden

The Australian 2024–2025 ‘mini-budget’ or Mid-Year Economic and Fiscal Outlook (MYEFO), released in mid-December 2024, was a tale of two narratives.

According to the government, it has delivered two surpluses so far and their “responsible economic management” has done the following:

“The budget position has improved by around a cumulative A$200 billion over the six years to 2027–28, compared to the 2022 Pre-election Economic and Fiscal Outlook (PEFO). As a result, debt is A$177 billion lower in 2024–25, helping to avoid around A$70 billion in interest costs over the decade.”

But digging into the figures reveals a shrinking surplus and an increase in net debt.

Shrinking surplus

Australia has experienced an extraordinary terms-of-trade boom combined with high inflation which drives up tax receipts. The government’s two surpluses thus far should have been much higher. Government decisions actually shrank those surpluses significantly. The Treasurer talks about banking 78% of the windfall – which of course means that 22% of the largest revenue windfall in Australia’s history was spent.

Over the timespan referred to in the quotation above, government decisions add 2.7% of GDP (A$78 billion) to debt. MYEFO reports that the cumulative deficit for the next four years will be A$143.9 billion.

Net debt rises

There has been a huge rise in off-balance sheet vehicles such as the Clean Energy Finance Corporation, Snowy Hydro 2.0 and the National Reconstruction Fund. Once one factors in those vehicles, the actual cumulative deficit over the next four years is A$233 billion. That’s an 8.1% increase in net debt when net debt currently stands at about 20% of GDP. For context, net debt increased by 7.1% during the financial crisis period of 2007–2008 to 2009–2010.

All of this underscores the need for economic reform to reduce spending and reform the tax system. Unfortunately, this government and the opposition have not presented plans for either and we would expect to see more detailed policies released by both major parties in the lead-up to the election.

Plausible assumptions

The other thing to always look out for is the key assumptions driving the forecasts. Here, there is slightly better news.

Real GDP growth increases to 2.75% over the forward estimates. That looks high relative to today, but it’s not implausible. The unemployment rate is assumed to hover around 4.25%. This is low by historical standards, but consistent with the RBA and Treasury view about the level of unemployment that is neither inflationary nor deflationary. This is important because higher unemployment leads to an increase in government support payments and a reduction in tax receipts.

CPI is assumed to come down over time to 2.5% which is the midpoint of the RBA’s inflation target range. This is entirely plausible – which is good, since it is an important driver of tax revenues.

So, the three key takeaways from MYEFO are:

1. The government’s view is too rosy

2. Australia’s fiscal position is problematic and will add a significant amount to net debt

3. The assumptions underlying the forecasts are fairly plausible.