QLD's budget "black hole" a catalyst for government action

Queensland has seen a substantial blow-out in its budget position according to the mid-year update provided by the new state government.

Budget blow-outs were understandably common at the height of COVID, but this significant deterioration has been driven by the recently-elected government factoring in what it regards as more realistic costings for spending on health, education, child services and infrastructure (state GST revenue is also lower, while spending, including interest payments, is generally higher).

Underfunding of government policies is a common problem for both Commonwealth and state budgets, even though some governments try to deal with the issue by using contingency reserves and the like.

In this case, the revisions are substantial, such that the new government should use the budget “black hole” as a catalyst for cutting spending and raising taxes in this year’s budget, a practice more usually seen at the Commonwealth level.

This strategy is clear from the update stating that, “the 2025-26 Budget will be developed in a methodical manner with the objective to deliver a safe and secure pathway to drive budget improvement, with lower debt than under the policy settings of the former government”.

Notwithstanding likely policy action, significant risks remain. In the near term, state government workers are pushing for higher wages, while in the medium term the cost of hosting the Olympics in 2032 could greatly exceed expectations and place significant pressure on the budget.

With relatively little change in the economic outlook, the huge spending revisions underpin much larger budget deficits across the forecast horizon, leading to a massive increase in public debt based on current policy settings.

The expected non-financial public sector cash deficit – which is the broadest measure of the budget balance – for 2024-25 has been revised from $19bn to $26bn, before fluctuating between $28bn and $31bn over the remaining three financial years of the forecast horizon (previously expected to narrow from $18bn to $10bn).

Gross public debt, as measured by non-financial public sector borrowings, is expected to balloon from $128bn in 2024-25 to $218bn in 2027-28 (previously a forecast increase from $125bn to $172bn).

To place this in perspective, Queensland debt will almost match the forecast borrowings of the two larger states by the end of the forecast period, where Victorian debt is expected to reach $258bn in 2027-28 and with New South Wales debt standing at $250bn (by way of comparison, Commonwealth securities on issue are forecast to reach $1.2tr by that time).

Put differently, Queensland’s non-financial public sector debt is forecast to rise from $23K per person in 2024-25 – which is the lowest debt burden of the three largest states – to $39K per person in 2027-28, which would exceed the expected burden of all other states, including Victoria at $37K.

Queensland Treasury Corporation has updated its issuance programme. On current policy settings, issuance of term debt for 2024-25 has been revised from $24.9bn to $26.9bn, with annual issuance for 2025-26 raised from $32.3bn to $41.9bn (the later years have seen even larger revisions to $44bn per annum).

Next week’s CPI - where the monthly CPI suggests that the trimmed mean CPI increased by less than the RBA had forecast in Q4 - is more important for whether the RBA acts on its newly-adopted easing bias, but today’s budget is another example of how the public sector is driving the economy at present.