Australia's federal budget is on-track for a deficit of $26.9bn this financial year and is not projected to return to balance until 2034-35, according to the mid-year economic update (Myefo).
On Wednesday the treasurer, Jim Chalmers, and finance minister, Katy Gallagher, released the update, which breaks Labor's streak of two full-year budget surpluses with a deficit in its third year, albeit one that is $1.3bn smaller than projected in May.
Chalmers and Gallagher said the result is "almost half the $47.1bn deficit we inherited for this year from our predecessors".
The economic statement sets the scene for a 2025 election in which Labor's economic management during high global inflation and both major parties' plans for future cost-of-living relief will be central issues.
The deficit is projected to increase to $46.9bn in 2025-26, or 1.6% of gross domestic product (GDP), before falling to $38.4bn in 2026-27 and $31.7bn in 2027-28, back down to a deficit of 1% of GDP.
The mid-year update said Australia's budget deficits are better as a share of the economy in every year over the medium term than the pre-election fiscal outlook, the position inherited from the Coalition when Labor was elected in May 2022.
"The underlying cash balance is projected to improve over the medium term, returning to balance by 2034-35," it said.
"Gross debt is expected to stabilise at 36.7% of GDP at 30 June 2027, before declining to 31.4% of GDP by 30 June 2035."
Economic growth in Australia is expected to increase from 1.4% in 2023-24 to 1.75% in 2024-25, and then 2.25% in 2025-26.
However, this is a downgrade on projections contained in May's budget, which forecast growth of 1.75% in 2023-24, then 2% in 2024-25.
The update said that "the impact of higher interest rates, cost-of-living pressures and global economic uncertainty has weighed on the Australian economy more than anticipated".
Chalmers and Gallagher said that "despite the pressures coming at us, we're on track for a soft landing and our budget strategy is helping".
"Our economy is growing, inflation is moderating, real wages are growing, unemployment is low, more than one million new jobs have been created, we're rolling out tax cuts and cost-of-living help to help people doing it tough, and there's now much less debt than when we came to office."
Although prices rose by 3.8% in 2023-24, higher than the 3.5% projected in May, inflation projections are largely unchanged since the May budget. Both the mid-year statement and budget project inflation of 2.75% for the next two years.
By contrast, the Reserve Bank projects that headline inflation will increase above 3% for some quarters in 2025-26, suggesting the treasury may be taking a rosier view due to the deflationary impact of cost-of-living policies yet to be announced, such as a further round of electricity price relief.
Inflation returned to the RBA's target band for the first time since 2021 in the September quarter 2024," the update said.
"This was supported by the government's cost-of-living relief in the 2024-25 Budget, which is expected to directly reduce annual inflation by 0.5% of a percentage point in 2024-25."
The mid-year update is pessimistic about the prospects of unemployment remaining low, suggesting that despite an unemployment rate of just 3.9% in November that the proportion of jobless Australians will rise to 4.5% in June.
The update reveals a total of $5.56bn spending over four years in "decisions taken but not yet announced" and measures for which the cost is "not for publication".
Commonly used as an inexact metric for the size of an unspent election war-chest, the figure includes confidential sums paid for Aukus nuclear submarines and an undisclosed sum for "enabling a reliable and secure energy transition".
The update reveals the government will provide additional funding of $1.2bn over six years from 2024-25 for the energy grid through recapitalising the Rewiring the Nation program "to provide additional concessional finance and underwriting support for transmission and distribution projects critical to Australia's energy transformation".
The update reveals that in addition to increasing fees for international student fees in July, the government will also increase the the visa application charge for temporary graduate visas by 14.75% from 1 February 2025, estimated to increase receipts by $1.7 billion over five years.
Ahead of the release, Labor boasted that it has improved the budget by a cumulative $200bn over the six years to 2027-28 inherited from the Coalition, despite $8.8bn of "unavoidable spending" in the mid-year update and $16.3bn in changes to payments and programs.
Chalmers and Gallagher said the government had done so by returning "78% of upwards revisions to revenue since the election, compared to our predecessors who averaged around 40%".
"Average real spending growth will be 1.5% over the six years to 2027‑28, which is less than half the 30-year average and around a third of our predecessors."