Why Jim Chalmers can’t stop smiling about his Budget update because of an ‘invisible’ cost YOU are getting stung with – and it’s not interest rates

Treasurer Jim Chalmers’s mid-year report showed how staggering personal income tax revenues are propping up the federal budget after major tax cuts are scrapped.

Dr Chalmers is all but guaranteed to deliver a surplus as the federal deficit forecast for this financial year is cut to just $1.1 billion in the Albana government’s mid-year budget forecast (MYEFO), released on Wednesday.

The update revealed a staggering $12.8 billion improvement to the 2023-24 budget.

To ease inflationary pressures, the Treasury will hoard huge windfalls rather than spend them.

Rising commodity prices and low unemployment have helped boost tax revenues, as has the elimination of the lower-middle-income tax offset (LMITO) and the scale slide, where workers receive larger wage increases but are forced into higher tax brackets .

CANBERRA, AUSTRALIA – NCA NewsWire Photos – DECEMBER 11, 2023: Australian Federal Treasurer Jim Chalmers’ portrait photo shoot in his office at Parliament House in Canberra ahead of a MYEFO event. Photo: NCA NewsWire/Martin Allman

In May, Dr Chalmers forecast a deficit of $13.9 billion for the current fiscal year.

However, the minuscule deficit is likely to put more pressure on Treasurer Jim Chalmers to introduce more cost-of-living measures in the next budget, scheduled for May 2023.

In recent weeks, the Treasurer has reached out to aggrieved government officials and community groups to demand more support as households suffer from high inflation and high interest rates.

State tax collections are growing

Total revenue receipts were $17.1 billion higher than expected in the May budget, outpacing increases in government spending, which rose by $4.3 billion.

Personal income tax collections were revised up by nearly $9 billion this fiscal year to more than $360 billion as a combination of low unemployment and rising wages that push workers into higher tax brackets boosts government revenue.

Meanwhile, tax revenue from mining and other non-mining companies rose to a record $137.9 billion, helped by rising prices for key commodities including iron ore, coal and gas.

The Treasury raised its iron ore price forecast to US$60 per tonne by the September 2024 quarter. In the May budget, officials expected prices for the commodity to fall to that level by March.

Rising prices for commodities such as iron ore have increased tax revenues for companies. Photo: AFP/Amy Koops

However, iron ore prices have risen in recent months to US$135 a tonne, more than double forecasts, casting doubt on the accuracy of the revised forecasts.

Indeed, federal and state treasuries have a history of underestimating commodity prices during boom periods, allowing governments to take advantage of higher-than-expected prices.

Tax revenue as a share of the economy will reach 23.7% this fiscal year, the highest since 2008, according to the budget update.

The mid-year update also said 92 percent of the revenue increase will be deferred over the four-year period, according to projections.

However, this Treasury estimate does not take into account the $13.2 billion spent on a 15 per cent pay rise for aged care workers and other off-budget funds worth almost $50 billion.

Despite the incredible revenues, the budget deficit is projected to continue to exceed forecast estimates, peaking at $35.1 billion in 2025-26 before falling to $19.5 billion in 2026-27.