Australia ramps up pre-election spending

Action plan: Chalmers speaks to the media as he arrives at Parliament House in Canberra. Australia’s treasurer is trying to steer a credible financial path by dragging down inflation in the near term. — Bloomberg

SYDNEY: Australia plans to unleash a wave of spending, from energy rebates to tax breaks for critical minerals and new warships, as the centre-left Labour government tries to win back voters ahead of an election due in a year.

The government’s books will swing into the red to the tune of A$28.3bil, or 1% of gross domestic product (GDP), in the financial year 2025, swelling to A$42.8bil in the following 12 months, the budget papers showed.

The 2025 deficit is more than double estimates and comes after the government posted surpluses in its first two years in office as it sought to restrain inflation.

“Australia faces long-term financial challenges due to climate change, an ageing population, regional security, and rising demand for care and support services,” Treasury said.

“The larger deficit is driven by the government’s cost-of-living relief and addressing unavoidable spending pressure.”

Treasurer Jim Chalmers is trying to steer a credible financial path by dragging down inflation in the near term.

He’s pushed major initiatives like a signature Future Made in Australia programme that aims to capitalise on the green revolution, as well as support for critical minerals, out towards the end of the decade.

The budget showed the near-term deficits are driven by cost-of-living relief and A$15.4bil for health and frontline services that were left unfunded by the previous administration.

Economists are concerned that the swing back into the red implies a more expansionary financial impulse that could result in interest rates staying higher for longer.

“The treasurer is not making the Reserve Bank of Australia’s (RBA) job any easier,” said Su-Lin Ong, chief economist for Australia at the Royal Bank of Canada.

“It’s going to make the job of getting inflation on a sustained basis back to target, particularly core inflation, harder. This will likely keep rates on hold for an extended period.”

Government assistance with living costs includes A$3.5bil to help reduce energy bills, which has the added advantage of cutting forecast inflation by about half a percentage point in the 12 months through June 2025.

Treasury’s estimates show inflation could return to the RBA’s 2% to 3% target later this year, about 12 months ahead of the central bank’s own estimates.

“The RBA is more likely to focus on the way the energy rebates mechanically lower headline consumer price index inflation,” said Andrew Boak, chief economist for Australia at Goldman Sachs Group Inc, who still expects easing to begin in November.

“However, the risks are skewed to rate cuts being delayed.”

Rates traders are so far leaning towards the RBA’s outlook, with a base case of no change this year and pricing for policy easing beginning in early 2025.

Economists expect the first rate cut to be delivered in November.

The RBA hiked 13 times between May 2022 and November 2023 to take the cash rate to 4.35% – a 12-year high – and has kept the door open to further tightening should inflation remain sticky.

“Cost-of-living pressures have resulted in cracks emerging in Australia’s impressive financial discipline,” said economist James McIntyre.

The surplus in the current financial year and the deficits ahead still leave Australia in better shape than the United States and other developed economies.

It’s among just a handful of economies to hold a AAA credit rating from all three agencies.

The government’s other big expenditure items include A$330bil over the next decade for defense and A$22.7bil for the Future Made in Australia policy, which aims to ramp up investment in green mining and high-tech manufacturing.

The vast majority of this spending has been pushed out to future years. Tax incentives for critical minerals and hydrogen only begin in the financial year 2028.

The government’s coffers have been aided by revenue from high commodity prices and a fully-employed economy, with unemployment at 3.8%.

The budget shows both of those strengths unwinding somewhat, with the jobless rate seen climbing to 4.5% by June 2025 and the terms of trade – the ratio of export prices to import prices – expected to drop 7.75% next in the financial year.

Another factor that boosted budget revenue was stronger-than-expected migration, which is now forecast to halve to 260,000 in the next financial year from 528,000 in the 12 months through 2023.

The budget’s swelling deficits have seen borrowing expectations rise, with net debt forecast at A$615.5bil, or 21.5% of GDP, in June 2026, compared with economists’ estimates of 19.9%.

Australia places well internationally here, too, with a developed-world average above 80%.

“The budget has added to medium-term structural deficits,” said Shane Oliver at AMP Ltd, who highlighted that spending as a share of GDP will settle well above pre-pandemic levels.

“This leaves it vulnerable if the economy weakens and sees no money put aside for a rainy day over the forecast period.” — Bloomberg

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