Australia Cuts Budget Deficit Forecast

SYDNEY (Reuters) – Australia's government on Wednesday trimmed its likely budget deficit for the current fiscal year, but flagged bigger shortfalls ahead due to "unavoidable spending" on health, cost-of-living relief, and veterans care.

Facing a tough election next year, the centre-left Labor government stated that the economy had slowed due to high interest rates and elevated inflation but insisted that public spending would help ensure a soft landing.

Recent data for Q3 revealed that without public investment in infrastructure and electricity cost rebates, the economy would have entered a recession.

In its Mid-Year Economic and Fiscal Outlook (MYEFO), the government revised its economic growth forecast for the current fiscal year, ending June 2025, to 1.75%, down from 2.0% in its main Budget last May. Wage growth estimates were also reduced to 3.0%, challenging government claims of faster pay gains than the Liberal National opposition.

The Reserve Bank of Australia (RBA) recently signaled potential easing of policies after maintaining interest rates at 4.35% throughout the year. Treasurer Jim Chalmers indicated more cost-of-living relief could be forthcoming, beyond current measures like tax cuts and electricity rebates.

Despite increased spending, the budget returned to deficit after two years of surpluses, with this year's shortfall projected at A$26.9 billion ($17.04 billion), lower than the A$28.3 billion forecast in May. However, future deficits are projected to worsen, reaching A$117 billion by 2027/28, largely due to automatic increases in spending on pensions, Medicare, and medicines.

Tax revenue estimates have also been downgraded due to subdued Chinese demand affecting Australia's main commodity exports, particularly iron ore. The long-term iron ore price assumption has been revised to $60 per tonne by the third quarter of 2025, compared to the current $104 per tonne.

The government's net debt is expected to rise to A$1.16 trillion by 2027/28, up from an anticipated A$940 billion this year, but still low by international standards at 36.7% of gross domestic product. Meanwhile, overseas migration estimates have increased to 340,000 for 2024/25 from 260,000, as the government tries to stabilize migration rates.

($1 = 1.5783 Australian dollars)