Federal government budget bottom line improved but offering few ...

Australians hoping to see their wages grow noticeably in real terms will have to wait longer than expected, with the federal government's budget update showing higher-than-forecast inflation savaging the benefits of higher pay. 

Key points:The mid-year budget forecasts real wage growth to be just 0.25 per cent this financial yearThe budget bottom line has improved since May, with a surplus in sight this financial year Australians will likely have to wait for next May's budget for more cost-of-living support

The Mid-Year Economic and Fiscal Outlook (MYEFO) shows an extra $64.4 billion flowing to government coffers in the next four years but that likely won't be seen in household budgets in the next year.

MYEFO offers few new spending measures and raises the likelihood that people will have to wait for May's budget for the government's next round of cost-of-living support.

High commodity prices, low unemployment and surging non-mining corporate profits are the drivers of the better budget position and leave open the high prospect of the government delivering its second consecutive surplus this financial year.

As expected, the budget update offers no change to the stage three tax cuts. 

Real wage growth lower than expected

The budget update trumpets that wages are growing at their fastest rate in more than a decade.

But that's not being realised in real wage growth, with inflation remaining higher than forecast. 

Real wage growth, which factors in wage growth and consumer prices, was tipped to be 0.75 per cent this financial year. That is now forecast to be just 0.25 per cent. Real wage growth forecasts for future years remain around what was expected in May. 

"Around the time of the election last year, real wages were falling 3.4 per cent and there has been a substantial improvement since then," Treasurer Jim Chalmers said.

"We've actually just seen two consecutive quarters with real wages growth, which is good progress. We still expect to see annual wages growth in a sustained way next year, that hasn't changed in the Treasury forecasts.

"Any of those near-term changes are more of a reflection of the inflation part of the story than the wages part of the story."

Treasury expects unemployment to rise to 4.25 per cent this year, up from 3.6 per cent at the end of 2022-23, and is forecast to remain around this level for the coming years.

The government says more than 600,000 additional people have been employed in the past 18 months, leading to close to record high levels of participation. 

"The unemployment rate has recorded its longest consecutive run below 4 per cent since monthly records began," MYEFO states.

The rental market is forecast to remain "very tight", with costs to remain high in coming years.

Budget fundamentals

Low unemployment helps the budget bottom line in two ways — with more people paying personal income tax and fewer people receiving unemployment benefits.

Higher costs also benefit the government via a greater tax take.

MYEFO expects inflation to be 3.75 per cent this financial year, before dropping to 2.75 in 2024-25 and 2.5 per cent in the following two years. 

Having forecast an almost $14 billion deficit for this financial year, the government now expects the deficit to be just $1.1 billion, a wafer thin forecast that leaves open the prospect of announcing a second budget surplus next May. 

The budget bottom line isn't expected to be as much in the red as earlier thought, with the government expecting its forecast underlying cash balances will be about $40 billion better off in the years ahead. 

"Tax receipts have been revised up by $64.4 billion over four years to 2026–27, primarily reflecting near-term strength in commodity prices, higher non-mining corporate profits and recent strong employment growth," MYEFO states. 

At the depths of the pandemic, the then Coalition government was forecasting a decade of deficits and net debt that was set to peak at almost $1 trillion in 2025.

The government is now forecasting net debt to reach $623 billion in 2026-27, but it is tipped to be lower than previously thought, which Treasury attributes to the improved budget bottom line and a decrease in the value of government bonds on issue. 

"Returning 88 per cent of tax receipt upgrades since coming to government is estimated to reduce gross debt by 10.5 percentage points of GDP in 2033–34 and avoid $145 billion in interest costs over the 12 years to 2033–34," MYEFO states.

Katy Gallagher and Jim Chalmers released their second budget earlier this year.(ABC News: Matt Roberts)

Passports to cost more, additional support for Ukraine

The budget update includes some new spending measures and additional charges.

The cost of getting a passport will increase 15 per cent from July next year.

The government expects that will pocket close to $350 million within three years, which will go towards funding other projects at the Department of Foreign Affairs and Trade.

The government will provide another $186 million to support Ukraine as it continues to battle Russia. This funding will expand Australia's training of Ukrainian fighters in the UK. 

New policy decisions since May will add an extra $1.1 billion to government payments in 2023–24 and by $6.5 billion over four years to 2026–27.

Finance Minister Katy Gallagher said MYEFO included about $10 billion in savings, about $7 billion of which is from earlier announced infrastructure funding cuts. 

Earlier this week, the government confirmed that interest payments on debt had outstripped the National Disability Insurance Scheme as the fastest growing payment.

Shadow Treasurer Angus Taylor said the government's mid-year budget update didn't do enough to support struggling households and reduce inflation.

"We're not seeing what we really need, which is measures taken to get to the source of the problem here, which is take pressure off inflation, take [pressure off] interest rates and in the process take pressure off hard working Australian families who are doing it tough," he said.

Decisions yet to be announced

MYEFO includes $270 million in decisions the government has taken but is yet to announce for 2023-24. The cost of unannounced decisions grows in each of the next three years, rising to about $1.8 billion in 2026-27.

During this time, the government is also expecting to make more money from decisions it's made but hasn't yet announced — but at lesser levels than its unannounced expenses.

The update makes no change to the contentious stage three tax cuts, which are legislated to come in next July and would see everyone earning between $45,000 and $200,000 paying 30 per cent in tax. The government would have to pass new legislation to delay or stop the tax cut taking effect.