The economy is forecast to slow sharply as high interest rates and weak global conditions weight on activity. Real gross domestic product is expected to grow by just 1.5 per cent next financial year and 2.25 per cent in 2024-25. While soft by historical standards, if Australia achieves these numbers is will outperform all major advanced economies.
As growth slows, price pressures are predicted to ease. After reaching 7.8 per cent late last year, headline inflation is forecast to drop to 6 per cent by the middle of this year and shrink to just 3.25 per cent by June 2024 and reach 2.75 per cent in mid-2025 - within the Reserve Bank of Australia's 2 to 3 per cent target band. Promisingly, these forecasts are based on interest rates having peaked at 3.85 per cent and coming down to 3 per cent by June 2025.
Demand for workers remains strong and job vacancies are historically high. This is expected to change as the economy slows, but only gradually as the demand for workers remains strong. The unemployment rate, currently at a near 50-year low of 3.5 per cent, is tipped to creep up to 4.25 per cent by mid-2024 and reach 4.5 per cent by June 2025 - still well below the pre-pandemic average of 5.5 per cent. The high level of employment has delivered the government a personal income tax windfall which will net an extra $10 billion next financial year and an additional $48 billion over the next five years.
The downturn in global commodity prices and increase in unemployment will mean that the surplus reported in this budget will be short-lived. On the government's own figures, this financial year's small $4.2 billion surplus will be wiped out next financial year, replaced with a $13.9 billion deficit. The budget will go even deeper into the red the following two financial years, reaching $36.6 billion in 2025-26 before narrowing slightly to $28.5 billion in 2026-27. Driving the outlook is a slowdown in tax revenue and increased spending, including on interest repayments, disability and aged care, defence and health care.
In its first two budgets the government has directed most of its revenue windfall to reducing overhanging debt. In all, it claims to have banked 91 per cent of the tax upgrade since coming to office. This has made some inroads into the debt bill. Gross debt will reach $923 billion (35.8 per cent of GDP) this financial year - $81 billion less than expected at the time of the October budget. Despite getting debt on to a lower trajectory, gross debt will still grow, reaching $958 billion in 2024-25 and topping $1 trillion in 2025-26.
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