Australia’s finances have been slugged by a $21.8 billion downgrade over the next four years as spending rises and tax receipts plunge.

The degradation of the fiscal bottom line was laid bare in Wednesday’s mid-year economic and fiscal outlook, which updates the forecasts made in May’s federal budget.

The expected deficit for the current financial year – 2024/25 – improved by $1.4 billion to $26.9 billion.

But the underlying cash balance is set to worsen over the following three years, leading to a wider deficit of $31.7 billion in 2027/28 and gross debt to be $49 billion larger than was forecast in the budget.

The return to red ink in the government books follows two straight surpluses of $22 billion and $16 billion in 2022/23 and 2023/24, respectively.

Global uncertainty and spending pressures drove “some slippage” to the budget’s bottom line, Finance Minister Katy Gallagher said.

“Despite the pressures coming at us, we’re on track for a soft landing and our budget strategy is helping,” she said.

Spending is set to increase by $25 billion from the budget forecast, including $16.3 billion in “automatic” increases through indexation and other boosts to pensions, veteran support and disaster relief funding, among other payments.

It also includes $8.8 billion on “unavoidable” increases, including extending measures such as Pharmaceutical Benefit Scheme listings and aged care programs that were facing funding cliffs.

Previously the government has been able to bank on revenue upgrades, mainly due to tax boosts from strong minerals demand from China, to pay for ballooning spending.

Wednesday’s update ends a string of huge upward revisions on tax receipts across the last four MYEFOs, which averaged $80 billion a year.

Company tax receipts have been downgraded by $8.5 billion over the four-year budget cycle – the first downward revision since 2020/21 – largely in part to China’s sluggish growth prospects.

The government’s “responsible budget management” had helped inflation come down since the 2022 election while providing cost-of-living relief to Australians, Treasurer Jim Chalmers said.

“We’ve struck the right balances here, very responsible set of books, striking all of the right balances, recognising that fighting inflation’s our number one priority, but we can’t ignore our responsibilities to people and we can’t ignore the risks to growth,” he told Sky News on Wednesday.

The government has offset some growth in spending by finding $14.6 billion in savings or “reprioritised” funds.

Gallagher lauded the government’s restraint in banking 78 per cent of upwards revenue revisions since the election, helping pay down debt and avoid $70 billion in interest costs over the decade.

“Our predecessors drove gross debt to around 40 per cent of GDP and they expected it to stay there until the end of the medium term,” she said.

Workers will see their pay packets grow at a slower rate than was predicted in May.

Wages growth forecasts have been downgraded a quarter of a percentage point to 3 per cent in 2024/25 and 2025/26, and 3.25 per cent in 2026/27, before accelerating to 3.5 per cent in 2027/28, in line with budget predictions.

Meanwhile the economy is set to grow 0.25 percentage points slower in this financial year than previously forecast, at 1.75 per cent.

“We know that growth in our economy has slowed more than we expected at the budget due to a combination of higher interest rates, cost-of-living pressures and global economic uncertainty,” Gallagher said.

“That’s why our economic plan is all about fighting inflation without ignoring the risks to growth.”

Unemployment and inflation forecasts remain unchanged from the budget, with price growth still predicted to stabilise at the Reserve Bank’s 2.5 per cent target in 2026/27.

-AAP