The situation has become more urgent due to the outbreak of inflation pressures that started last year, partially fueled by easy fiscal and monetary policy. Central banks, including the Reserve Bank, are now driving up interest rates at their fastest pace in decades.
In March, then-treasurer Josh Frydenberg forecast a $78 billion deficit this financial year after a $79.8 billion shortfall in 2021-22.
High-priced commodities, inflation, strong employment growth and a delay in some spending has improved last year’s bottom line by about $50 billion. Some pundits have used these figures to suggest the country’s budget pressures are easing.
But a deficit of about $30 billion, likely to be confirmed this week, would still rank in the 10 largest deficits of Australian fiscal history.
And the deficit reduction is being driven by unusually high prices for a handful of key commodities. As previous treasurers have discovered, commodity prices can both go up and down.
Reserve Bank governor Philip Lowe this month noted that it was more than strange that Australia, benefiting from record low unemployment and the highest ever prices for key commodities, was still recording substantial deficits.
The fastest growing cost of the budget is the interest bill on federal debt.
In the March budget, the national interest bill was supposed to reach $17.9 billion this financial year. By 2025-26, the Parliamentary Budget Office says it will hit $26.3 billion.
That’s an $8.4 billion or 47 percent increase in four years.
It dwarfs the jump in the NDIS (22.4 per cent), health (13 per cent), aged care (18.9 per cent) and defense (16.4 per cent).
By 2025-26, the interest on federal debt will cost taxpayers more than what is spent on child care subsidies and financial support to carers
And that is predicated on rates as they were forecast in early March. Interest costs have gone up considerably since, with next month’s budget likely to reveal a sharp lift.
That’s just the interest equation facing Chalmers and Gallagher. The issues touched upon by Philip Lowe in his speech – that taxpayers want an increasing number of high-quality services – is another.
Every budget comes with a set of promotional booklets known by budget-watchers as “glossies”.
These are used by the government to deliver an easy-to-ready overview of the budget. They normally include panels outlining the major spending and saving initiatives.
Treasurers Costello, Swan, Hockey and Morrison all outlined both the big spends and the big cuts in their “budget overview” glossy. Frydenberg followed that tradition in his 2019 pre-election budget that outlined $2.6 billion in savings (of which $2.1 billion came from a single measure, changing the social security income assessment model).
But the savings measures disappeared in Frydenberg’s 2020 COVID budget. They did not return in 2021 amid the uncertainty pandemic was still causing.
And they weren’t there in Frydenberg’s pre-election budget of March this year.
Repairing the budget is politically fraught at the best of times.
Doing it after more than two years without any substantial cuts in expenditure is even tougher.
Doing it during difficult domestic and global economic conditions that require the most aggressive tightening of monetary policy in decades puts it into the realm of political impossibility.
Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.