Budget Deficits to Overshadow Australian Economy Over the Next 40 Years

Detail view of documents during the Budget lockup in Canberra, Australia, on May 9, 2023. (Martin Ollman/Getty Images)

Australia will unlikely see a budget surplus in the next 40 years due to increasing government spending and slow economic growth, the latest Intergenerational Report (IGR) has found.

The Treasury Department released the 2023 IGR (pdf), which provides a snapshot of how the Australian economy and government’s budget are expected to evolve over the next four decades.

While there are positive economic prospects, such as higher income and fewer working hours for the population, deficits would become a “budget feature” for a long time, raising concerns about the economy’s sustainability.

According to the report, Australia would see a budget surplus of less than one percent of the total GDP (gross domestic product) in the 2022-2023 financial year before reporting a deficit of around 0.5 percent of GDP in 2023-2024.

The deficit will then rise to over one percent of GDP in the following year and hover at or below this level for the next two decades.

From the 2040s, the deficit is predicted to widen until it reaches around 2.6 percent of GDP by 2062-2063.

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Gene Tunny, the director of the economic consulting firm Adept Economics told The Epoch Times that in general, budget deficits were not necessarily a bad thing if they were relatively small and the government was using borrowed money to invest in productive infrastructure.

However, he noted that the characterisation of the projected deficits in the report was concerning.

“First, persistent deficits are the starting point. We are starting out with a structural budget deficit,” he said.

“Once you consider the huge amounts of debt governments accumulate during recessions and the tendency for governments to find new things to spend money on, you start worrying that we'll end up with much larger deficits and debt than the report is projecting.

“In that case, the growing interest cost of the debt could start to cause trouble for future governments and taxpayers.”

Mr. Tunny also pointed out that the growing deficits from around the mid-2030s would be unsustainable if the government allowed it to continue indefinitely.

This would cause future governments to impose spending restraints or tax increases, he added.

Rising Government Spending

High government spending is a major reason for the upcoming decades of budget deficits.

The report showed that government expenditures would grow by 3.8 percent points over the next 40 years to 28.6 percent of GDP by 2062-2063.

The five areas that will see the most significant increases in government spending are health, aged care, the NDIS (National Disability Insurance Scheme), interest on government debt, and defence.

Specifically, health spending will rise by two percent of GDP, followed by aged care at around 1.4 percent, the NDIS at 1.2 percent, interest payment at 0.7 percent, and defence at 0.4 percent.

When combined, these payment categories will account for half of the total government expenditures by 2062-2063, up from the current 33 percent.

An elderly woman rests on a bench in Sydney, Australia, on June 2, 2016. (Brendon Thorne/Getty Images)

Meanwhile, the spending increases in health, aged care, and the NDIS reflect the impact of the aging population on the economy.

The report projected that the Australian population would continue to grow older, with the number of people aged 65 and above to double in the next four decades.

Additionally, the percentage of over-85s and those older than 100 years old will soar by three times and six times, respectively.

As the population ages, fewer people will participate in the workforce, directly contributing to a slowdown in economic growth.

The government forecasted that the Australian economy would grow by an average of 2.2 percent per year in real terms in the next four decades, down from 3.1 percent over the past 40 years.

The Cost of Debt Keeps Rising

Meanwhile, high debt is also piling pressure on the budget as it forces the government to spend more to service its financial obligations.

Excessive borrowings during the COVID-19 pandemic caused Australia’s gross debt to rise to a decades-high of 39.3 percent of GDP in 2020-2021.

However, the government expected gross debt to drop to 22.5 percent by 2048–2049 before rising again to reach 32.1 percent of GDP by 2062–2063.

In addition, interest payments on government debt will rise from around 0.7 percent of GDP in 2022-2023 to 1.4 percent in 2062-2063.

Mr Tunny said while a 32 percent gross debt-to-GDP ratio forecast for Australia was much lower than those of other countries, such as the United States (nearly 120 percent), there was a concern about the increasing debt trajectory from the 2050s and into the 2060s.

“Debt would keep growing to a point where it was unsustainable in the decades after that if budget repair measures weren’t taken,” he told The Epoch Times.

“So the report suggests we are on a path to an unsustainable level of debt eventually.”

Moreover, the economist said there was a lot of uncertainty about the government’s forecast and that gross debt could end up much higher than the estimated 32 percent.

“There are so many unknowns it’s really impossible to project the debt-to-GDP ratio that far in the future. If deficits turn out larger or interest rates higher, debt could end up much higher,” he said.