Australia Faces Swelling Debt, Deficits Even as Spending Curbed

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(Bloomberg) — Australia faces mounting debt and deficits ahead even as Treasurer Jim Chalmers scrimped and saved in his first budget to hold down spending and avoid further fueling inflation.

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The budget deficit will widen from 1.5% of gross domestic product this fiscal year to 2% of GDP in 2024-25, Treasury figures showed Tuesday. That comes at a time when high commodity prices and an ultra-tight labor market are bringing windfall revenue to the government’s coffers.

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Chalmers is aiming to establish the Labor government’s fiscal credibility by ensuring his budget doesn’t drive interest rates even higher. That approach contrasts with the former UK administration’s mini-budget of unfunded tax cuts that set off market chaos.

“The global economy teeters again, on the edge — with a war that isn’t ending, a global energy crisis that is escalating, inflationary pressures persisting, and economies slowing — some of them already in reverse,” Chalmers said in his speech to parliament.

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“While we intend to avoid the worst of the turbulence from overseas, we cannot escape it completely.”

New spending in the budget mainly involved the government delivering on its election pledges, ranging from expanded parental leave to increased childcare subsidies and funding for clean energy projects. These were all-but offset by A$28.5 billion in savings and extra revenue raised over four years.

Chalmers forecasts wage growth will accelerate to 3.75% this fiscal year and next and exceed inflation in 2024. That would fulfill a key election promise to resume real wage growth in Labor’s first term of office.

Despite putting more than 90% of its commodities windfall back into the budget, the government still forecasts net debt rising to 23% of GDP this fiscal year and climbing to 28.5% in 2025-26. That in part reflects rising global government bond yields.

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Australia’s deficit and debt levels are still well ahead of Group of 20 counterparts. Their average budget deficits are forecast to hold above 3% of GDP through 2026 and government debt hover around 77% in 2023.

That explains why Australia is one of only a handful of countries with a coveted AAA credit rating from all three major agencies.

Treasury warned Tuesday of challenges facing Australia’s largest trading partner, China, as it deals with a housing downturn and fallout from a Covid Zero policy.

“Chances of severe outbreaks, further declines in the property sector, ineffectiveness of fiscal stimulus, and weakening global demand for Chinese exports have tilted risks heavily to the downside,” Treasury said.

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Unveiling Labor’s first budget since winning office in May, Chalmers managed to hold down spending growth to an annual average of just 0.3% of GDP over four years.

Other key announcements included:

Economists had warned too much new spending would overheat an already strong economy as the Reserve Bank is in the midst of its sharpest policy tightening cycle in a generation.

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Governor Philip Lowe has signaled further hikes ahead after raising the cash rate to 2.6% this month from 0.1% in May to help bring inflation back the bank’s 2-3% target. Data out Wednesday is likely to show headline consumer prices accelerated to 7% in the third quarter, the fastest pace in 32 years.

Both the RBA and Treasury forecast inflation will peak at just under 8% later this year.

Chalmers said the cost of living relief he was delivering was likely to “make life easier for Australians without adding to inflation.” He also highlighted that much of the spending would generate economic dividends.

The treasurer said that Australia has plenty going in its favor, including very low unemployment of 3.5% and “good prices for our exports.”

—With assistance from Victoria Batchelor and Garfield Clinton Reynolds.

(Adds, chart, additional budget stories)