Treasurer Jim Chalmers’ mid-year budget update has revealed how a staggering personal income tax windfall is propping up the Federal Budget after a major tax break was axed.
Dr Chalmers is all but guaranteed to deliver back-to-back surpluses with the Federal budget deficit forecast for this financial year slashed to just $1.1billion in the Albanese Government’s mid-year budget outlook (MYEFO), released on Wednesday.
The update revealed a staggering $12.8bn improvement to the 2023-24 budget.
In a move designed to ease inflationary pressures, the Treasurer will bank massive revenue windfalls rather than spending them.
Soaring commodity prices and low unemployment fuelled bumper tax receipts, as did the abolition for the Lower and Middle Income Tax Offset (LMITO), and bracket creep, where workers earn bigger wage rises but are forced into higher tax brackets.
CANBERRA, – NCA NewsWire Photos – DECEMBER 11, 2023: n Federal Treasurer Jim Chalmers portrait photoshoot in his office at Parliament House in Canberra ahead of MYEFO. Picture: NCA NewsWire / Martin Ollman
In May, Dr Chalmers forecast a deficit of $13.9bn for the current financial year.
But the razor-thin deficit is likely to heap more pressure on Treasurer Jim Chalmers to deliver additional cost of living relief in the next budget, scheduled for May 2023.
In recent weeks, the treasurer has fielded demands from aggrieved government backbenchers and community organisations for increased support as households are crunched by high inflation and soaring interest rates.
Government tax collections soar
Total revenue receipts were $17.1 billion higher than expected in the May budget, outstripping an increase in government spending which was up by $4.3bn.
The personal income tax take has been revised up by almost $9bn this financial year to reach above $360bn as a combination of low unemployment and wages growth, which pushes workers into higher tax brackets, adds to government revenues.
Meanwhile, tax receipts from mining companies and other non-mining firms swelled to a record $137.9bn bolstered by the surging prices for key commodities including iron ore, coal and gas.
Treasury has pushed out its forecasts for iron ore to reach $US60 a tonne to the September quarter 2024. In the May budget, officials had anticipated prices for the commodity would fall to this level by March.
Soaring prices for commodities like iron ore have bolstered the company tax take. Picture: AFP / Amy Coopes
However, iron ore prices have increased in recent months to hover at $US135 a tonne – more than double the forecasts – calling into question whether revised the updated forecasts will be accurate.
Indeed, federal and state treasuries have a track record of underestimating commodity prices during boom periods, enabling governments to take advantage of higher-than-expected prices.
Tax revenue as a share of the economy will reach 23.7 per cent this financial year, according to the budget update, the highest since 2008.
The mid-year update also states 92 per cent of the revenue upgrades will be banked over the four-year, forward estimates period.
However, this estimate by the Treasury does not account for the $13.2bn spent on the 15 per cent wage increase awarded to aged care workers and other off-budget funds worth almost $50bn.
Despite the bumper revenue windfalls, budget deficits are forecast to continue over the forward estimates, peaking at $35.1bn in 2025-26 before falling to $19.5bn in 2026-27.