Treasurer Jim Chalmers has been able to rely on revenue windfalls to paper over the cracks of Australia's precarious fiscal position in previous years, but the budget's luck was running out, Deloitte Access Economics partner Stephen Smith said.
Inflation and higher commodity prices helped boost the tax take by almost $100 billion in the 2023 budget, which turned an expected $77 billion deficit into a $22 billion surplus, despite net policy decisions leaving the budget worse off.
The uncomfortable dividend of conflict on the other side of the world was less pronounced this time, with negative impacts to Australia's economy weighing down the budget as well.
Oil prices surged to the highest level since the start of the war on Thursday, with no end in sight to the blockade of the Strait of Hormuz, making it increasingly likely the severe downside scenario Treasury is cooking up for the budget will come to pass.
In Deloitte's Budget Monitor report, Mr Smith forecast a deficit for 2025/26 of $33.2 billion, a modest improvement from the $36.8 billion deficit projected in the December mid-year update.
"Economic developments that deliver sugar hits on the revenue side will jeopardise the budget's health elsewhere," said Mr Smith.
"A sustained oil supply shock could substantially slow demand, while the Reserve Bank of Australia may have to hike interest rates further than anticipated."
More heavy-handed cost-of-living support, such as the three-month cut to the fuel excise from early April, would entrench high inflation and require a more aggressive response from the RBA, he said.
Even without new support measures and with bold efforts to constrain spending growth in the NDIS, increased expenditure in existing programs is likely to offset most of the revenue windfall.
Dr Chalmers warned not to expect big upgrades in the budget, with revenue to be downgraded in some years.
"Reform is urgent not despite global uncertainty, but because of it," he said.
"This budget will be calibrated to the economic conditions we confront in the global economy with a premium on what's right for the times and consistent with our ambitions and obligations to the future."
Mr Smith said the ongoing structural deficit underscored the need for real reform over short-term measures - which would take political courage.
As would resisting the urge to grandfather existing assets amid changes to pare back negative gearing and capital gains tax concessions, he said.
A better option would be to phase in changes across the board, which would bring in more revenue and avoid creating a two-tiered system.
In a podcast interview on Thursday, Dr Chalmers hinted tax arrangements would remain unchanged for existing asset holders.
"Without getting into hypotheticals about policies, what you try and do is to make sure that we recognise the decisions that people have taken in the past," he told Commonwealth Bank chief economist Luke Yeaman.
Mr Yeaman also expected the budget windfall to be smaller than in previous years, but forecast a slightly smaller deficit of $29 billion.
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