Deloitte warns Federal Budget ‘is structurally flawed’ as Jim Chalmers plays down hopes for revenue rescue

Pressure is mounting for Jim Chalmers to sharpen the axe in his upcoming Federal Budget as economists from Deloitte warn years of revenue windfalls have “papered over” structural flaws in the nation’s finances.

It will be crunch time for the Treasurer, who on Thursday was hosing down speculation the Middle East war and mooted tax reform would bring a new wave of cash into Canberra’s coffers.

News on Wednesday that inflation had surged to 4.6 per cent on the back of higher petrol prices will add to the reasons for Dr Chalmers to put the squeeze on spending.

Analysis from Deloitte forecast a $27.6 billion deficit looming next financial year unless the Government finds further cuts or new tax sources.

Borrowing will be about $120b over four years and take net debt to 22.5 per cent of the economy — still a low number by international standards.

“The Federal Budget is structurally flawed,” Deloitte Access Economics partner Stephen Smith said.

“The revenue windfalls of recent years, a result of soaring commodity prices and surging inflation, temporarily papered over Australia’s precarious fiscal position. But even another commodity and inflation boost cannot cover up the fiscal cracks.”

War in Iran could add $19b in revenue over four years as hot commodity prices drive company tax payments higher, the report forecast.

That’s a silver lining in what will otherwise be a damaging conflict for the world economy. Deloitte already tips Australia’s jobless rate to hit 4.9 per cent next year.

“A sustained oil supply shock could substantially slow demand, while the Reserve Bank of Australia may have to hike interest rates further than anticipated,” Mr Smith said.

“The ‘fast five’ spending areas — defence, the NDIS, aged care, health and interest costs — are all essential, but their growth is outpacing revenue at an unsustainable rate.”

The National Disability Insurance Scheme is already in the Federal Government’s sights with a promise to save $22b over four years by cracking down on access.

Yet the challenge will be much wider. Government spending as a share of the economy has increased dramatically since COVID-19 to the highest level in 40 years at about 28 per cent, adding to demand and drawing workers from the private sector.

Federal spending has surged 60 per cent since the 2019 financial year, with much of that increase baked in by the former Coalition Government.

Economists including AMP’s Shane Oliver have warned the outlays were a key factor adding to inflation, which was already rising months before the war started.

Dr Oliver last week declared the Treasurer should target $100 billion of savings by 2030.

Responding to the Deloitte analysis, Dr Chalmers said reform was “urgent” because of global uncertainty.

“This budget will be calibrated to the economic conditions we confront in the global economy with a premium on what’s right for the times and consistent with our ambitions and obligations to the future,” he said

“Responsible economic management has been a hallmark of this Labor government and it will be a hallmark of this Labor budget.

“People shouldn’t expect big upgrades to revenue and I’ve been upfront that in some years revenue will be downgraded.”

The Treasurer also conceded that the surge of inflation to 4.6 per cent in the year to March was “confronting” and blamed the Middle East war.

Despite the hip pocket pain, predictions of a third interest rate hike when the RBA meets next week eased marginally.

Core inflation, which is tracked by the Reserve Bank as it strips out volatility, remained at 3.3 per cent in the latest data.

Markets nonethless expect a 70 per cent chance of a rate rise.

Shadow Treasurer Tim Wilson said the “Labor Government left us exposed”.

“Wednesday’s jump in inflation was larger than of any major advanced economy,” he said.

“If the Iran conflict ended tomorrow, it would not fix the underlying inflation problem, because that problem is homegrown.”

With the Treasurer talking up the urgency of reform to make the economy more resilient and boost productivity — which will lift wages long term — Deloitte lobbed a handful of ideas into the mix.

The biggest would be increasing the tax-free threshold from $18,200 to $35,000 while also cutting marginal tax rates for high income earners.

Yet it’s unclear whether widely-expected changes to capital gains tax or negative gearing would bring enough money onboard in the near future to pay for such a big move.

Deloitte estimated dropping the capital gains discount to 33 per cent would raise only $60m over four years if existing assets were exempted. Abolishing negative gearing would raise $180m under the same grandfathering conditions.

Capital gains currently have a 50 per cent discount applied before taxes are calculated so as to offset the impact of inflation.

The concession has been blamed as a factor in Australia’s housing affordability crisis as the policy effectively treats owning land the same way as investing into a business or shares.

Dr Chalmers remained tight-lipped about his plans but “welcomed” debate. He said the tax system was too generous for asset owners and not generous enough for workers.

Deloitte’s Mr Smith said reform was overdue.

“Australia’s tax system is not equipped to efficiently or equitably raise the revenue needed to fund the country’s growing spending needs,” he said.

“To do nothing is to increasingly rely on younger generations of wage-earning Australians to foot a greater share of the budget.”