Hard-pressed households have been warned not to expect a big cash splash in next Tuesday's budget despite predictions of a massive $83 billion boost to government revenue over the next four years.
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Leading economic forecaster Deloitte Access Economics reckons Treasurer Jim Chalmers will reveal an $8.7 billion deficit for 2022-23 in a stunning turnaround in the Commonwealth's finances from last October, when the deficit was expected to reach $36.9 billion.
But Deloitte partner Stephen Smith warned the improvement, driven by soaring commodity prices and high employment, will not result in big handouts because the government will be wary of not adding to inflation.
"The temporary surge in tax receipts is delivering an astonishing turnaround in the government's fiscal position," Mr Smith said, adding that the budget "crept back into the black" in the 12 months to March but was likely to end the financial year in minor deficit.
The government has come under mounting pressure to increase support for households being squeezed by high inflation and rising interest rates, including calls to increase the JobSeeker allowance and rental assistance.
Treasurer Jim Chalmers has said the budget will include a "substantial" cost-of-living package particularly targeted to the most vulnerable, but has stressed that support will be provided in a responsible manner so as not to add to inflation.
And he said most of the revenue windfall will be used to pay down government debt.
Mr Smith said the government had to tread a fine line in providing enough assistance to make a meaningful difference without undermining the Reserve Bank of Australia's efforts to bring inflation down.
"Something will be included to cushion the cost-of-living blow," the Deloitte partner said.
"Do too much, though, and the government risks putting additional upward pressure on inflation and encouraging the Reserve Bank of Australia to hike interest rates further.
"Do too little and low-income households, and the economy more generally, will be left teetering, especially after the eleventh interest rate increase over the past year."
Mr Smith warned the brighter short-term outlook for the budget would not last, with the size of government set to swell as major areas of spending grow.
He said the government's share of the economy would increase because of looming costs in seven large, fast-growing and critical areas of expenditure: health, education, welfare payments, aged care, the NDIS, defence and interest costs. He also backed an increase in the JobSeeker allowance.
The Deloitte economist said the anticipated growth in spending reflected the public's increased demand for services and appeared "unavoidable".
But to ensure it was sustainable, he said the government needed to make some tough revenue calls.
"The budget needs more revenue and that means tax revenue needs to increase overall," Mr Smith said. "But that doesn't mean that every tax should increase."
The economist said personal tax collections were too high, even factoring in the stage three tax cuts, and called for the tax-free threshold to be increased from $18,200 to $30,000, the GST rate should be lifted to 15 per cent and the capital gains tax discount should be reduced.
