Dr Brendan Rynne, KPMG Chief Economist, comments on the Budget: “politically savvy, economically questionable”.
KPMG’s Budget brief containing our full response to the Budget is here – Federal Budget 2025 | Breakdown & analysis – KPMG Australia.
The Treasurer has landed this year’s Budget deficit within a bull’s roar of the MYEFO estimate, with the Headline Cash Balance coming in at -$27.6 billion. He has also been able to trim down the pathway of forecast deficits by $1.2 billion and $5.9 billion for the Underlying Cash Balance and the Headline Cash Balance respectively.
But despite these improvements it appears none of these savings have found their way to the nation’s balance sheet, with gross debt forecast to still be $1.16 trillion at the end of FY27/28, consistent with the MYEFO estimates. Further, overall net debt is forecast to rise by over $210 billion over the forward estimate period.
What is surprising in the Budget, given this economic setting, is the provision of further tax cuts and broad-based cost-of-living relief to all taxpayers and all households over the next few years. These initiatives are being funded by debt; not from windfall gains from surging Terms of Trade or from above-average productivity.
Added to this household “cash splash” is a continued expansion in public sector spending, both in absolute and relative terms, pushing the share of the government sector in the economy to its highest levels since World War 2.
While the $17bn cost of this unexpected tax cut to the budget is significant, it should not have a material impact on the RBA’s thinking on inflation, as the $5 a week per person is unlikely to generate individual spending. We still anticipate two more rate cuts this year, although not next week.
The house-building forecasts contained in the Budget also seem to us to be over-optimistic, given increasing supply has been plagued by a combination of rising costs, construction companies going bust and delays at various levels of government. Housing has a long lead time before policy levers take effect.
This is clearly a pre-election budget, which squarely puts off the critical economic reform our nation needs. With current deficits and debt levels we can get away with this approach for a few years, but the policy challenges facing this nation are not abating, and ultimately they have to be addressed, if living standards are to be maintained. Over the next decade, the tax to GDP ratio is set to increase and in the absence of serious tax reform, bracket creep will be relied on more and more.
The Budget is politically savvy, but economically questionable, as it is fixed firmly on the nation’s credit card.
Economic headlines
- A forecast underlying cash balance of $42.1 billion in FY25/26; a $4.8 billion improvement on the recent MYEFO estimate.
- Nearly $85 billion of “off-budget” spending over the forward estimate period, resulting in cumulative Headline Cash Balance deficits of $236 billion over the four years to FY28/29.
- Gross debt balloons to $1.22 trillion by the end of FY28/29, an increase of $283 billion over debt levels projected for the end of this financial year.
- Growth in government spending continues to outpace aggregate GDP growth, resulting in public sector spending as a proportion of GDP peaking at 28.5% next financial year; up from 24.1% in FY18/19 (and 21.4% in FY 99/00).
For further information
Ian Welch
KPMG Communications
0400 818 891
iwelch@kpmg.com.au
