MYEFO projects fiscal deficit for the next decade

Treasury projects that Australia will remain in a fiscal deficit for the next decade, the Mid-Year Economic and Fiscal Outlook (MYEFO) revealed on Wednesday (17 December).

In 2025–26, Australia’s deficit was $36.8 billion, or 1.3 per cent of GDP, down from a projected $42.1 billion. The MYEFO projected that this would fall slightly by 2028–29 to $36 billion, and the budget would remain in deficit until at least 2035–36.

In a joint statement, Treasurer Jim Chalmers and Finance Minister Katy Gallagher said progress had been made in the face of “growing, unavoidable spending pressures.”

“We’ve had to accommodate $35 billion in payments variations, including an extra $6.3 billion in natural disaster relief, $3 billion for the Age Pension and $2 billion in veterans’ entitlements,” they said.

“Despite these pressures, we’ve delivered a stronger budget position through our responsible approach.”

The government said that it had identified an additional $20 billion in savings and reprioritisations by reducing spending on consultants, enhancing the integrity of Veterans’ Affairs’ programs, and reverting deeming rates to pre–pandemic levels.

While Treasury expects the fiscal deficit to narrow from now to 2028–29, Deloitte’s recent budget monitor painted a less rosy picture of the government’s finances. They forecast that the gap between revenue and spending would worsen over the forward estimates, leading to an underlying cash deficit of $44.6 billion in 2028–29.

To address the structural budget deficit, Deloitte said a substantive rejig of Australia’s tax system would be necessary, including a shift from income to consumption taxes, reducing the capital gains tax (CGT) discount and introducing an inheritance tax.

In 2025–26, the government forewent $25.95 billion in concessional taxation of superannuation earnings, $29.2 billion in rental deductions and $21.79 billion from the CGT discount, excluding exemptions made for main residences and small businesses.

Collectively, GST exemptions also cost the government $30.6 billion, the outlook revealed.

In the MYEFO, Treasury acknowledged the reform directions identified following its August economic reform roundtable, one of which was “a better tax system.”

While the mini-budget did not include any major tax reform, the government pledged further investments into the tax system. This included $9 million over the next four years to support the Inspector-General of Taxation and Taxation Ombudsman’s operations and $8.8 million to help the ATO deliver improvements to ASIC’s business registers.

The government also pledged $16.1 million over four years to implement a domestic crypto tax reporting regime, as part of its implementation of the OECD Crypto Asset Reporting Framework (CARF) to boost cross-jurisdiction exchange of tax-relevant information on crypto assets.

Stronger-than-expected tax collections had caused the forecast budget deficit for 2025–26 to be revised to $36.8 billion in the MYEFO, down from $42.1 billion in the budget, according to AMP chief economist Shane Oliver.

However, he said structural pressures would lock in deficits over the medium term, and expected government spending to hover around 27 per cent of GDP.

“The MYEFO implies continued high levels of government spending and a fiscal easing this financial year as the deficit deteriorates.”

“Ongoing high levels of public spending and fiscal easing are contributing to capacity constraints in the economy and higher than otherwise inflation and interest rates.”