[Source: Reuters]

Australia’s Labor government is set to reveal a vast improvement in the budget bottom line next week as its coffers bulge with tax windfalls, yet the outlook will be a sober one as fiscal challenges loom large.

Treasurer Jim Chalmers has spent weeks using “restraint” and “responsible” to describe his second budget since coming to power in May last year.

There will be some money to offset cost of living pressures, particularly on energy prices, and perhaps a long-delayed rise in unemployment benefits. Chalmers has flagged more support for renewable projects and a ramp up in defence spending with an eye to China’s expanding influence in the region.

Yet, he is well aware that too much fiscal largesse could stoke inflation just when the Reserve Bank of Australia (RBA) has aggressively lifted interest rates to fight it.

Instead, the aim is to bank any budget savings, and there are plenty to go around. High prices for Australia’s commodity exports have delivered a windfall from mining profits, while job gains boosted income tax and lowered welfare payments.

As recently as October, Chalmers had forecast a deficit of almost A$37 billion ($24.47 billion) for the year to end June 2023. Now, analysts expect it to be closer to A$5 billion.

Indeed, the running 12 month total is actually in surplus, a big deal for a budget that has not been in the black since 2008.

The previous Liberal National government had “Back in Black” mugs made in 2019 when it came within a whisker of a surplus, only for emergency pandemic spending to blow a record-breaking hole in the accounts.

Any surplus would be fleeting, however, given resource prices are well off their peaks and the domestic economy is slowing in the face of decade-high interest rates. The latter have also sharply raised the cost of funding the government’s near-A$1 trillion in debt.

Indeed, the running 12 month total is actually in surplus, a big deal for a budget that has not been in the black since 2008.

The previous Liberal National government had “Back in Black” mugs made in 2019 when it came within a whisker of a surplus, only for emergency pandemic spending to blow a record-breaking hole in the accounts.

Any surplus would be fleeting, however, given resource prices are well off their peaks and the domestic economy is slowing in the face of decade-high interest rates. The latter have also sharply raised the cost of funding the government’s near-A$1 trillion in debt.

Labor has also promised to honour a commitment by the previous government to slash income taxes from 2024/25, cuts that are projected to cost a budget-busting A$254 billion over the first 10 years.

The cuts are not especially popular with the public given the vast majority go to the higher paid, but Labor is loath to break an election promise and seems boxed-in.