Highlights of the 2024-25 Mid-year economic and fiscal update

The 2024-25 Mid-year economic and fiscal update was released on 18 December 2024. Budget spending in 2024–25 is expected to be substantially higher than in 2023–24, leading to a forecast deficit. Over the forward estimates period, the forecast deficit is now higher than was forecast at the 2024–25 Budget.

Budget spending in 2024-25 compared with 2023-24

The budget position (on an underlying cash balance basis) for 2023–24 was a surplus of $15.8 billion; the estimated budget position for 2024-25 is a deficit of $26.9 billion. The switch from surplus to deficit is in line with the forecasts from the 2024–25 Budget.

The deterioration in 2024–25 compared with 2023–24 can be understood by considering the money flowing to the government (receipts) and away from the government (payments). While the estimated receipts for 2024–25 is 2% ($15.6 billion) higher in nominal terms than 2023–24, estimated payments are 9% ($58.3 billion) higher. The higher expenses occur across many of the government’s functions, most notably for social security and welfare for the aged and those with disabilities, as well as for education, health. and housing.

Some of the uptick in expenses in 2024–25 can be put down to government spending decisions – Figure 1 below shows the cumulative effect of government decisions from 2021 onwards on payments. The increase in payments between 2023–24 and 2024–25 due to government decisions since 2021 is $15.6 billion. The rest of the $58.3 billion then comes from ‘parameter and other variations’ - changes outside of the government’s direct control, such as changes to economic forecasts.

Figure 1           Effect of government decisions since 2021 on payments

Source: Budget and MYEFO documents since 2021.

Downgrades to the budget over the forward estimates period

Looking over the forward estimates period, the deficits are forecast to persist. The expected magnitude of the deficits has worsened since the 2024–25 Budget.

The cumulative deficit over the 4 years from 2024–25 has been revised from $122.2 billion in the 2024–25 Budget to $143.9 billion in the 2024–25 MYEFO. Of the $21.7 billion downgrade, policy decisions accounted for $17.5 billion and ‘parameter and other variations’ accounted for the other $4.2 billion.

Beyond the underlying cash balance

In fiscal analysis, the underlying cash balance (UCB) is often the go-to metric for assessing the overall budget balance. However, there are instances where cash injections into the economy do not significantly impact the UCB. This occurs when governments engage in policy actions such as equity purchases or loan provisions. These transactions predominantly affect the headline cash balance (HCB) rather than the UCB.

While these policy measures do not influence government finances in the same manner as expenditures recorded in the UCB—since loans, for example, are expected to be repaid—they still introduce cash into the economy, potentially influencing aggregate demand. The additional cash outflow is captured in the budget under 'net cash flows for investments in financial assets for policy purposes'.

As illustrated in Figure 2, the forecast cash outflows from the government for these purposes have increased in the MYEFO.

Figure 2           Net cash flows from investments in financial assets for policy purposes

Source: PBO historical fiscal data; Budget and MYEFO documents since 2023.

For further information on the MYEFO, the Parliamentary Budget Office has released its comprehensive snapshot of the budget update.