Key Takeaways
- Australia’s budget deficit is worsening, with MYEFO projections showing higher deficits and rising debt across coming years.
- Ongoing deficit spending risks further declines in living standards, particularly for younger generations.
- Historical deficit-financed stimulus has increased employment but often at the cost of real wages and living standards.
- Rising government debt is expected to be repaid through higher future taxation.
- Investors and households should consider how long-term fiscal policy may impact inflation, interest rates, and asset markets.
The Impact of Campaign Commitments on Australia’s Budget Deficit
What I'm looking at today is how the major campaign announcements we've seen in recent weeks, and those expected in future weeks, will affect the Australian budget deficit.
I think when the political history of this current period is written, significant emphasis will be placed on the long-term friendship between Prime Minister Anthony Albanese and the former Premier of Victoria, Daniel Andrews. This is a close friendship, which might even be referred to as a "bromance".
Lessons from Daniel Andrews and Debt-Funded Policy
Andrews was a grand master politician. At the state level, he understood how his party worked and how to control it, knowing what to give different parts of it to ensure they stayed in line. He also understood how the budget cycle worked. Very significantly, he knew how to campaign, how to be a master of the campaign, and how to manage big project announcements, which in his case were always debt-financed.
He was skilled at making announcements in such a way that they took the oxygen out of his opponent's campaign. Still, as I say, these projects were always deficit-financed. As a result, we saw Victorian debt levels rise relative to other Australian states.
Deficit Spending, Keynesian Economics, and Living Standards
Deficit spending was first analysed in the 1930s by Maynard Keynes. At that time, the major issue was deflation, meaning price levels were falling. As a result, real wages were rising, and people were being thrown out of employment.
Maynard Keynes argued that running deficits would lift the price level, which would reduce real wages and push workers back into employment. This lead to a situation where employment rose, but living standards fell.
Just so, this current period of deficit spending, particularly in the US and to a lesser extent here in Australia, has driven down living standards and generated much of today's political sentiment.
The Long-Term Cost of Rising Government Debt
The problem in Australia is that this debt will be paid down by younger generations who will pay a higher proportion of their income in taxes.
As I mentioned earlier, further deficit spending will only worsen this problem of living standards; it will not make it better. The current government under Albanese is heading in this direction, with an increasing deficit and levels of debt.
MYEFO Projections Signal Worsening Deficits
A couple of months ago, Treasury released the Mid-Year Economic and Fiscal Outlook (MYEFO), which showed how future budget deficits and debt levels are moving compared to last year's budget.
According to the MYEFO, the deficit for the year ahead (2025–26) was expected to be $42.8 billion. However, that deficit rose by $4.1 billion to $46.9 billion.
For the year after that (2026–27), the deficit was projected to be $26.7 billion but, according to MYEFO, increased by $11.7 billion to $38.4 billion.
In 2027–28, the projected deficit of $24.3 billion from last year’s budget was project to rise to $31.7 billion. So, the deficit problem is worsening, and as expected, that means the debt problem is also getting worse.
Australia’s Gross Debt Outlook
In last year’s budget, the level of gross debt was expected to be $1.007 trillion for 2025–26. But in MYEFO, that expanded by $21 billion to $1.028 trillion.
By 2026–27, the debt level is expected to expand by $36 billion, and the following year, by $49 billion. This shows that the situation is getting worse, not better.
Understanding how government debt and inflation interact can be critical when reviewing investment strategy and asset allocation.
Looking Ahead to the Federal Election
Looking ahead to the election, given that Albanese has learned much from Daniel Andrews, we can expect to see the announcement of big projects.
We've already seen the expansion of Medicare announced, and we're sure to get more before the budget is finalised.
The problem is that this situation of expanding deficits, which was a particular specialty of Daniel Andrews and is now a speciality of Anthony Albanese, will make the issue of living standards worse, not better.
Let's see what further data we can get on this when the budget is released on 25 March.
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FAQs
How does Australia’s budget deficit affect investors?
Budget deficits can influence inflation, interest rates, and government borrowing levels, all of which may impact investment returns.
Why does rising government debt impact living standards?
Higher debt often leads to increased taxation or inflation over time, reducing real disposable income.
What is MYEFO and why does it matter?
The Mid-Year Economic and Fiscal Outlook provides updated projections on government spending, deficits, and debt, helping assess fiscal sustainability.
Can deficit spending stimulate economic growth?
While it may boost short-term activity, long-term deficit spending can reduce living standards if it fuels inflation and higher taxes.
How should investors respond to ongoing fiscal deficits?
Investors may consider diversification and professional advice to manage exposure to inflation, interest rate changes, and market volatility.
