Analysis outlines pathway to a balanced budget

Cost of living relief must be targeted and temporary and cash splashes shelved if the federal government is serious about taming inflation and returning the budget to balance in the next 10 years, new PwC analysis shows.

Modelling by the major consulting firm shows Australia could return its budget to balance in less than a decade if the government remains laser-focused on the bottom line.

PwC Australia chief economist Amy Auster said the May budget was shaping up to be another "bread and butter" budget in the face of slowing growth and a budget position still recovering from the shock of the pandemic.

"To quickly tame inflation and ensure our economic downturn is short and shallow, we need the government to keep a steady hand on the bottom line, avoid a cash splash and chip away at the structural deficit to set us up for long-term economic success," she said.

Ms Auster said the budget was in a much better position post-COVID and had been buttressed by additional revenue from high commodity prices and an inflation-fuelled tax hike.

But she said the government needed to be mindful about handing out too much relief or risk stoking inflation. 

"Any efforts to provide 'bread and butter' relief in this budget must be very targeted and very temporary so as to not undercut the RBA's efforts to tame inflation."

The modelling paints a picture of gradually trimming spending by 0.15 per cent of GDP each year for the next 10 years, which is $3.7 billion in today's dollars.

This would return balance to the amount of money coming in versus flowing out - what's known as a structural deficit - by 2031-32.

The subsequent return to surpluses could then run debt down to zero by 2045 if the government remains committed to budget repair.

But the researchers recognise cutting spending at this scale will not be easy as budget pressure continues to emerge.

For example, the stage three tax cuts are expected to drain billions in expected revenue, according to Parliamentary Budget Office analysis forecasts, at the same time as big-ticket spending items such as aged care, the NDIS, health, defence and the public debt interest bill continue to swell.

"Cutting $50 billion or more over a 10-year period is tough, but can be achieved by assiduously managing growth areas like defence, health care and the NDIS, while finding savings elsewhere," the analysis says.

A failure to fund these savings will "bake in" this expenditure into future budgets and result in the budget increasing as a proportion of the economy. 

In the short term, the report says this will put more pressure on the Reserve Bank as it tries to drive down inflation, and in the medium term, it will lift the amount of tax the government needs to contain the growing debt burden.