The federal budget is headed for a deficit of $26.9 billion this financial year – $1.3 billion better than the estimate in May – but in the following three years the budget is forecast to be deeper in the red than earlier forecast.

The budget update, released by Treasurer Jim Chalmers and Finance Minister Katy Gallagher on Wednesday, shows a sluggish Australian economy and a cumulative deficit of $143.9 billion across the four years of the forward estimates. This compares to $122.1 billion in the May budget.

The update predicts a return to budget balance only in 2034-2035.

The Mid-year Economic and Fiscal Outlook (MYEFO) shows a comparatively modest potential election war chest of up to $218.6 million this financial year and $828.1 million in 2025-26. These are labelled in the update “decisions taken but not yet announced”.

But these annual figures are deceptive in relation to what will be actually promised for next year’s election, because much of the cost of promises would also be pushed into the outer years. Over four years the figure is $5.6 billion in payments.

A portion of the unannounced decisions would be for confidential commercial payments and the like.

The government has flagged more cost-of-living relief to be announced in coming months.

Average real spending growth is estimated to be 1.5% over the six years to 2027-28, which would be under the 30-year average. But real spending growth this financial year is put at 5.7% (26.5% of GDP).

The update includes gross savings of $14.6 billion.

The update says: “In the face of significant economic headwinds, the Australian economy is on track for a soft landing”.

Despite difficult circumstances, “there has been encouraging progress on a number of fronts. The economy has continued to grow, inflation has moderated substantially, over a million jobs have been created since the middle of 2022, the participation rate is near record highs, real wage and disposable income growth has returned, the gender pay gap is at record lows and business investment is at near decades highs.”

The update shows inflation of 2.75% in 2024-25, within the Reserve Bank’s target range of 2-3%. But this will still include the effect of government cost-of living relief, which the bank discounts when considering interest rate movements.

Unemployment, at 3.9% currently, is forecast to rise to 4.5% this financial year.

Economic growth is forecast to be 1.75% this financial year, up from 1.4% in 2023-24, and 2.75% in 2025-26. The improvement in growth is “expected to be supported by a gradual recovery in household consumption”.

Wages are forecast to grow 3%, down from the outcome for the 2023-24 year of 4.1%.

“Government’s cost-of-living tax cuts, together with the anticipated easing in inflationary pressures and continuing employment and wage growth are expected to drive growth in real household disposable incomes in 2024–25,” the update says.

The upgrades in tax receipts are much more modest this year than the $80 billion upgrades on average in the last four budget updates.

Excluding GST and policy decisions, tax receipts have been revised up by $7.3 billion over the years to 2027-28. For the first time since the 2020-21 budget company receipts have been revised down, reflecting weaker commodity volumes as a result of the weakness of the Chinese economy.

Net debt in 2024-25 is $540 billion, a decrease of $12.5 billion from the budget.