MYEFO 2023: Second surplus in sight as Jim Chalmers soaks up ...

Overall, the budget bottom line over the forward estimates – from 2023-24 to 2026-27 – is now forecast to record a cumulative deficit of $74.5 billion, down from the $114.1 billion forecast in the budget.

The MYEFO shows that since the May budget, tax receipts over the forward estimates are $64.4 billion higher than forecast.

To maximise downward pressure on inflation, and help pay down debt, Dr Chalmers claimed to have banked 92 per cent of the revenue windfall. The Opposition disputes this, saying it does not factor in the impact on spending due to changed economic conditions.

For example, spending on the National Disability Insurance Scheme has blown out by $2.6 billion over the four-year forward estimates since May, as the program once again exceeds its budget.

The document attributed the blowout to pricing decisions by the National Disability Insurance Agency, which increased support budgets in response to the Fair Work Commission’s decision to raise award wages by 5.75 per cent on July 1.

The tax receipt uplift is due predominantly to personal income taxes being $30 billion higher than forecast, including $9 billion for this financial year, and company tax receipts being $34.5 billion higher over the four years and $9.2 billion higher for this financial year.

The tax-to-GDP ratio has reached 23.7 per cent, the highest since the 23.9 per cent during the Howard government.

Company tax receipts are due to commodity prices staying much higher than the conservative estimates in the budget.

For example, while Treasury forecasts the iron ore price to fall from $US117 in March 2023 to $US60 per tonne by mid-2024, the price of the commodity has increased to $US137 since the budget.

Finance Minister Gallagher has found $9.8 billion savings since the May budget, but the main component comes from pushing $7.4 billion in infrastructure spending beyond the forward estimates in response to the recent infrastructure audit, which found there were too many projects on the books.

The government canned 50 projects as part of a “prioritisation”.

Among the new measures in MYEFO was a move to end the ability for businesses and workers who do not pay their tax on time to deduct any late fees from July 1, 2025. The measure will raise $500 million per year.

The general interest charge is incurred when a tax debt has not been paid on time, while the shortfall interest charge is levied when a taxpayer incorrectly self-assessed how much they owed the government. Both charges are currently tax deductible.

The budget document described the removal of tax deductibility as a fairness measure.

The government will also raise an extra $349 million by hiking passport fees by 15 per cent on July 1, 2024. The increase would push the cost of a 10-year adult passport up by $48.75 to $373.75.

The document says the money will be redirected to the Department of Foreign Affairs and Trade.

The MYEFO shows little variation in key parameters since May.

For example, headline inflation is now expected to fall to 3.75 per cent by the June quarter 2024, which is 0.5 of a percentage point higher than expected at the budget.

“The primary driver of this upgrade is the recent rise in global oil prices,” MYEFO says.

“While oil prices have subsequently retreated, movements in oil prices
and the exchange rate this year have added to near-term petrol prices and inflationary pressures.”

Otherwise, inflation forecast remain unchanged with MYEFO predicting CPI to fall to 2.75 per cent next financial year, back within the target band of the Reserve Bank of Australia.

The Treasury forecast on inflation are more optimistic than those of the RBA which expects inflation to stay above the target until December 2025. Dr Chalmers said the difference was for the RBA to explain.

Wage growth will continue to outstrip CPI this financial year onwards, allowing the government to claim it has delivered real wages growth.

It does contend that the cost of living relief introduced late last year, including discounted power bills, are expected to reduce annual headline inflation by 0.75 of a percentage point this financial year.

“Nonetheless, the impact of higher interest rates and elevated but moderating inflation on households is expected to weigh on economic activity in the near term,″⁣ it says.

Economic growth, 3.1 per cent last financial year, will slow to 1.75 per cent this year, which has been upgraded from 1.5 per cent forecast in the budget.

Surging revenues mean gross debt as a share of GDP will now peak at 35.4 per cent of GDP in 2027-28, which is 1.1 percentage points lower than forecast at the May budget.

Despite the improved debt position, the sharp increase in long-term bond yields since May means the debt interest bill is forecast to be the federal government’s fastest growing expense, overtaking the National Disability Insurance Scheme.

The interest bill on the federal government’s $909 billion in gross debt is expected to grow at an average rate of 11.7 per cent per annum over the next decade, up from 8.8 per cent in the May budget.

The increase means the federal government will spend $80 billion more money than previously forecast over the next 10 years paying interest.

Treasury estimates the average cost of new government borrowing has risen to 4.7 per cent from 3.4 per cent in May.

Of the $5.2 billion in “unavoidable spending” the government says has been forced upon it since the budget, the largest is the $1.5 billion cost of winding up the COVID-19-era pandemic event visa, the cessation of which was announced as part of the government’s migration review released on Monday.

The visa, introduced by the Morrison government, allowed graduates and others on working visas to apply to stay an extra year. It will be abolished in February with the expectation that 70,000 of these visa holders will depart over the following 12 months.

The revenue loss will come from lost income tax receipts.

MYEFO shows that over the 10-year medium term, government spending as proportion of GDP will increase from 26.4 per cent forecast in the budget to 26.6 per cent.