Australia’s army of workers will carry more of the federal budget, with company tax collections tipped to suffer their first fall since the COVID pandemic as China’s economic slowdown and the ramifications of the Trump presidency hit the government’s bottom line.
Treasurer Jim Chalmers, in Wednesday’s mid-year fiscal update, will reveal company tax collections – which have already softened this year – will be down $8.5 billion on his May budget forecasts as demand from China and prices for key commodities such as iron ore, coal and LNG soften.
Softening prices for key commodities including oil and gas, due to the slowdown in China, will hit the federal budget.Credit:
On top of extra spending in areas including veterans, Medicare and childcare, the budget deficit – which Chalmers forecast in May to hit $28.3 billion – is expected to widen. Some economists tip it could exceed $42 billion.
Only the surprising strength of the jobs market is preventing the budget from sinking further into the red. Unemployment unexpectedly fell to 3.9 per cent in November to be lower now than it was at the start of the year.
That strength is evident in personal income tax collections which, to the end of October, were $5 billion ahead of what Chalmers forecast in the May budget.
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But the same figures also confirmed company tax revenue sliding to lag forecasts by $1.7 billion. Company tax is the federal government’s second-largest revenue source.
Chalmers said the slowdown in China, where officials last week vowed to cut interest rates and lift government borrowing to support the economy, was of particular concern as it absorbed about a third of Australia’s exports.
“Challenges in the Chinese economy will have flow-on effects for our own budget, and that will be clear in Treasury’s forecasts,” he said.
“The global economy is uncertain, the global outlook is unsettling, and that’s weighing heavily on our economy.”
“Challenges in the Chinese economy will have flow-on effects for our own budget”: Treasurer Jim Chalmers.Credit: Alex Ellinghausen
The last time company tax collections slipped from their budget forecast was in 2019-20 – then treasurer Josh Frydenberg had to deal with an $8.9 billion single-year collapse due to the impact of the pandemic. Chalmers’ downgrade will be milder and spread out over four years.
Economic growth also slumped, with the country enduring its biggest three-month contraction since the early stages of the Great Depression.
Growth has slowed sharply over the past 12 months but remains positive. Annual growth in 2023-24 was 1.2 per cent, compared with 2.4 per cent in 2022-23. Without population growth and government spending, the economy would have slipped into recession.
The mid-year update will also have to start accounting for the policy agenda of President-elect Donald Trump, who has threatened to impose tariffs of up to 20 per cent on imports to America. Already, he has threatened China, Mexico and Canada – America’s three largest trading partners – with extra tariffs.
At the weekend, the government revealed the budget would take a $1.8 billion hit over the next four years due to a faster-than-expected lift in payments flowing to the nation’s veterans. The May budget contained an extra $6.5 billion in veterans’ support as the government cleared a backlog of more than 60,000 cases left by the Morrison government.
The clean-up and repair from Tropical Cyclone Jasper that hit Far North Queensland in December 2023 continues to affect the budget.Credit: Twitter
Spending on natural disasters, including Tropical Cyclone Jasper, which hit Far North Queensland late last year, will also cost the budget about $2 billion.
On Monday, Housing Minister Clare O’Neil will announce the second round of funding from its Housing Australia Future Fund, which will fast-track the construction of 5000 new social homes nationwide.
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States and territories will have until the end of January to submit projects, which must add to the existing stock of social housing. Funding will be available on a “use it or lose it” basis and follows funding for 13,700 homes announced in September.
The public service has already been pressed into extra work in the run-up to the mid-year update, with staff pulled from non-Finance and Treasury sectors to lighten the load.
On Sunday, Chalmers said he and Finance Minister Katy Gallagher had been working simultaneously on the mid-year update and the March 25 budget.
“We work around the clock and around the year on these budgets,” he told Sky News.
“This work is more or less non‑stop. We’ve been meeting the expenditure review committee, some things are for the mid‑year budget update, some things are for March.”
But shadow treasurer Angus Taylor said the government should focus on policies that would reduce inflation and enable the Reserve Bank to cut official interest rates.
He said the country had endured an unprecedented seven consecutive quarters of negative growth per capita while spending was growing rapidly.
“This is a disastrous budget situation, which reflects the government taking us on a pathway to economic ruin,” he told Sky News.
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Shane Wright
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