Beware of ‘political plasters’ in upcoming budget, Deloitte warns

Deloitte Access Economics has revealed its pre-election budget forecast, predicting an underlying cash deficit of $26.1 billion and revenue downgrades of $11.3 billion over four years, following two consecutive surpluses.

In the latest version of its bi-annual Budget Monitor report, Deloitte noted its cash deficit prediction was now smaller than what had been previously forecasted in the 2024–25 Mid-Year Economic and Fiscal Outlook.

Deloitte Access Economics Partner Stephen Smith said governments needed to stop relying on ‘unforeseen’ revenue upgrades in place of a sustainable fiscal strategy.

“The recent recipe for a smooth budget update has involved the use of conservative ‘technical assumptions’ for commodity prices, which set a low bar for revenues and prime the forward estimates for upward revisions. Some luck on economic developments helps too,” Smith said.

“But that recipe may fail this time. Treasury’s commodity price assumptions look less conservative than they have for some time. And there are some genuine economic surprises on the downside that mean revenues are simply not going to measure up this time around.”

In the report it was outlined that revenue upgrades would be driven by strength from the labour market and the “fortunes” of major companies.

However, this was likely to be offset by a softer period for company profits and slower economic growth compared to the official forecasts.

Deloitte Access Economics partner Cathryn Lee said with escalating spending pressures across health, aged care, the NDIS and defence, Deloitte predicted the underlying cash balance to be cumulatively $13.1 billion worse off over the four years to 2027–28.

This would push net debt to 23.9 per cent as a share of GDP from an estimated 19.6 per cent, Lee said.

As the federal election loomed, Smith and Lee said Australians should be aware of “quick fixes” as politicians often employed multiple methods to obscure the fiscal impact of spending decisions.

“One reason Australia’s longer-term fiscal health might not get the attention it deserves is because it’s too easy for politicians to paint the numbers any colour they feel. There are ways that governments can spend money – and run up debt – faster than what might be implied by the underlying budget balance,” Smith said.

“Off budget spending and revenue decisions are common, such as the recent changes to HECS debt repayments. Government investments that are expected to earn a commercial return also avoid showing up in the underlying budget measures.”

“All these tricks obscure the debate around Australia’s long-term fiscal outlook and detract from an honest conversation about the fiscal challenge.”

In addition to this, it was noted the budget was a “built-in mechanism” to stealthily raise taxes without there being a need for politicians to announce it as well as temporary support measures that often had negative long-term impacts.

Lee said it was evident that economics was not aligned with politics as the projected write-down in the upcoming budget represented a significant shift in the intensity of political pressures.

“The fiscal challenges facing the current government will be inherited by any incoming government. Ideally, the abrupt shift in the fiscal narrative would inspire a robust competition of ideas going into the election, with voters then having their say on meaningful proposals to put Australia on a firmer fiscal footing,” she said.

“Unfortunately, the election is more likely to put an outsized focus on flashy proposals designed to woo voters who are focused on their day-to-day.”

“This will distract from a pressing policy issue facing the nation: the fiscal holes in Australia’s medium-term budget outlook are getting bigger, not smaller. No politician is putting forward a credible plan to plug those holes.”