Australian Government debt nudges $1 trillion as Budget returns to deficit

Australia will hit a record level of debt when the Government unveils a federal Budget that shows a structural worsening in the bottom line.

Treasurer Jim Chalmers spruiked the Government’s “responsible economic management” for limiting gross debt to $940 billion in 2024/25 as he prepares to unveil the Budget on Tuesday night.

While that’s a record for the Commonwealth and up from the $906.9 billion figure in 2023/24, it’s $177 billion lower than it was projected to be in a fiscal update before the last election in 2022.

That means taxpayers will avoid having to fork out $60 billion in interest costs over the 11 years to 2032/33, despite borrowing costs rising since the last election.

“We’re paying down Liberal debt and the Budget will show that’s saving taxpayers tens of billions of dollars,” Dr Chalmers said.

“In dollar terms, Labor’s responsible economic management has delivered the biggest budget turnaround in a parliamentary term in history.”

The Government points to $95 billion in savings across its four budgets as proof it is responsible for the turnaround in the bottom line.

But the Budget “table of truth”, as dubbed by economist Chris Richardson, tells a different story.

This reconciliation table shows “parameter variations” - for example, factors outside the Government’s control, such as commodity prices - have contributed to more than 100 per cent of budget upgrades.

In other words, the Government’s decisions have stood in the way of an even bigger improvement in the Budget bottom line.

Australia’s federal debt is still fairly low compared to the rest of the world, at just over a third the size of the economy.

In the UK, government debt is almost as large as GDP while the US has eclipsed 120 per cent.

But Australia’s debt is expected to grow as public spending increases and a temporary boost to revenue fades, peaking at 37 per cent of GDP.

Increasing pressures on the Budget in the form of defence, health, aged care, the NDIS and interest payments are leading to a widening structural deficit position, Deloitte Access Economics partner Stephen Smith said.

“So there’s these big-ticket spending items that are continuing to build and build over the next decade, at the same time as revenue, our tax system is really one of yesteryear and is not expected to be able to keep pace with that spending challenge,” he told Sky News on Monday.

“What we really need is reform to the tax system. Quite frankly, we may need to raise more tax into the future to ensure that we can pay for these spending priorities, but to do that in a way that’s more effective, more efficient, more equitable.”

Deloitte Access Economics expects this year’s underlying deficit to be slightly better than predicted in the December update at $26.9 billion.

But Mr Richardson and other economists have said the underlying deficit was becoming increasingly irrelevant because the Government used an accounting sleight of hand to shovel more spending “off-budget”.

These measures are classed as investments which will supposedly make a return for the Government, although in recent years have more often made a loss than a profit.

Spending promises such as a $2.4 billion package to bail out the collapsed Whyalla steelworks and forgiving $16 billion in student debt will only appear in the headline deficit but will still impact government debt.

Deloitte expects the value of these off-budget measures to reach $99 billion across the four years in the Budget outlook.