Federal budget: no tax break for low- and middle-income workers as economic outlook worsens

The Albanese government will not extend the low and middle income tax offset (LMITO), meaning workers earning less than $126,000 will not get a tax break, worth up to $1,500, beyond 2022.

Unemployment is also expected to be higher, when compared to the July economic forecast, because of the global economic headwinds, interest rate hikes and sustained inflationary pressure. That combination of challenges will dampen economic activity over the next 12 months, and force unemployment up to 4.5% in 2023-24.

While inflationary pressure would remain front-and-centre for households and businesses, higher commodity prices and historically low unemployment levels will deliver the Albanese government a revenue boon over the next two years.

The forecast for tax receipts on Tuesday night will be revised up by more than $100bn over the forward estimates. But Treasury expects that windfall to be short lived.

Two-thirds of the forecast revenue upgrades were concentrated in the first two years of the forward estimates, which was 2022-23 and 2023-24.

Treasury expected employment growth to slow and commodity prices to moderate over the two remaining financial years, while baked-in expenditure on essential services would have a more profound impact on the budget bottom line. Higher inflation would also increase the indexation of government payments.

Ahead of delivering its first budget, the Albanese government confirmed this week the National Disability Insurance Scheme was forecast to cost $8.8bn more than expected across the forward estimates. That signature scheme was now forecast to cost more than $50bn a year by 2025-26.

Higher spending on the NDIS, health and defence would increase the deficit over the last two years of the forward estimates.

Treasurer Jim Chalmers has been signalling for weeks that fiscal and monetary policy needed to be in alignment to help subdue inflationary pressure in the economy.

The budget would provide for additional drugs to be listed on the Pharmaceutical Benefits Scheme. The government would also extend eligibility for Covid-19 antivirals, effective 1 November.

Chalmers confirmed on Friday the October floods would have an impact on inflation. Fruit and vegetable prices were likely to increase by 8%. But fuel prices were expected to be lower than forecast despite Labor choosing to end the temporary cut in fuel excise.