Debt Storm Brewing: Economists Warn Australia’s Budget on Shaky Ground

Australia’s fiscal trajectory has sparked warnings from an economist and think tank, who point to the widening deficit and lack of restraint around government spending.

While there were minor improvements for Australia’s financial position in the short term, the long-term forecasts reveal a troubling scenario of escalating debt and stagnant productivity.

Treasury’s Mid-Year Economic and Fiscal Outlook (MYEFO), released by Treasurer Jim Chalmers, predicts a slightly reduced deficit for this financial year at $26.9 billion (US$16.7 billion)—$1.3 billion lower than earlier estimates.

However, combined deficits over the next four years are now projected to reach $143.9 billion, about $21.8 billion worse compared to prior forecasts.

Economist Warns of Future of High Taxes and Debt

John Humphreys, chief economist at the Australian Taxpayers Alliance, points to “discretionary spending” as the primary driver of the budget’s impending blowout.

“The projected 2025/26 deficit of $47 billion is unjustifiable and unsustainable, especially given the government’s massive increase in tax revenue in recent years,” Humphreys stated. An increase in tax revenue refers to the income the government receives from businesses or individuals.

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Humphreys criticised the absence of clear discipline in handling the federal budget and warned that additional spending, including $9 billion slated for 2025/26 alone, will exacerbate the unstable situation of Australia’s finances.

The economist also expressed scepticism about the government’s long-term plans to achieve fiscal balance within a decade, describing it as overly optimistic.

“It’s easy to promise future surpluses, but as the time approaches, political incentives to spend grow stronger. Without a drastic change, Australia faces a future of high taxes, low productivity, and mounting debt.”

Not Attempt to Deal with Long Term Issues: Think Tank

Graham Young, executive director of the Australian Institute for Progress, said there was no attempt to deal with deeper “structural issues” in the economy.

He said the government’s expenditure is growing faster than its income, a problem compounded by the volatile nature of resource revenues.

In recent times, the Australian government has relied heavily on taxing commodities like iron ore being exported to China. However, with a downturn in the Chinese economy, the volume of taxes has shrunk.

“Instead of banking resource revenues to stabilise the budget, we’ve used them to expand government projects, shifting wealth from the private sector to the public,” Young said.

He warned that this trend is shrinking the economy’s productive base, with fewer people engaged in wealth creation and more relying on redistribution through taxpayer-funded programs.

Young also flagged the risks posed by runaway costs in the taxpayer-funded National Disability Insurance Scheme (NDIS) and childcare subsidies, which, coupled with an ageing population, are driving spending higher.

“There is no credible plan to reverse debt accumulation. In fact, another $5 billion in election promises is expected, adding to the burden on future generations.”

Calls for Reform

Both Humphreys and Young called for urgent reforms to address Australia’s economic malaise.

Humphreys advocated for substantial tax cuts to spur productivity, citing the stagnation of the past eight years and the ongoing per-capita recession through the last seven quarters. He argued that high income taxes are discouraging investment and innovation, further hampering economic growth.

Young called for a reversal of policies that prioritise government expansion over private-sector growth.

“Without bold steps to rein in spending and stabilise the economy, we risk passing on a legacy of perpetual debt and low productivity to our children and grandchildren,” he warned.