An extra $25 billion not enough to guarantee more budget surpluses

In the past week, the government has announced spending of more than $500 million for its Future Made in Australia policy while it is forgoing $3 billion by reducing the interest charged on Higher Education Loan Program debts.

The Reserve Bank board starts its two-day meeting on Monday with financial markets and economists not expecting a change in official interest rates which are currently at 4.35 per cent.

After higher-than-expected inflation figures were released in late April, markets put the chance of a rate rise by October at 60 per cent. But data last week showing a sharp fall in retail sales forced markets to wind-back those expectations to 35 per cent.

Founder of Rich Insight, economist Chris Richardson, said if the budget did not include any extra spending it would be on track for a surplus of $13.4 billion this financial year before moving to a $14 billion deficit in 2024-25.

Richardson said the current financial year was enjoying an extra $100 billion in revenue on what had been forecast in early 2022.

But he warned the budget bottom line was under pressure from growing cost pressures, while the economic environment meant the government should be slicing expenditure to reduce the threat of inflation.

‘The government will desperately want at least one interest rate cut under its belt before going to the polls.’

Economist Chris Richardson

“Rising defence and NDIS and NDIS-related spending pressures are enormous, while the revenue surge of recent years is slowly passing,” he said.

“The government will desperately want at least one interest rate cut under its belt before going to the polls. So, with that risk hanging over it, the government will need to be careful with its extra spending in the budget.”

AMP chief economist Shane Oliver is expecting the surplus for the current financial year to be between $10 billion and $15 billion due to better-than-expected company and personal tax collections.

He also expects the budget to return to the red in 2024-25 with a deficit of about $12 billion.

Oliver said Chalmers needed to use the budget to reduce the inflation impulse in the domestic economy.

“With inflation proving sticky the budget needs to take slightly more out of the economy than it puts back in so as to make the RBA’s job easier,” he said.