BUDGET 24-25: modest improvement

ANZ Research expects the May federal budget to show an estimated budget surplus of $A4.5 billion on an underlying cash basis, in 2023-24, followed by a projected deficit of $A15.25 billion for 2024-25.

Deficits are also likely in 2025-26 and 2026-27, although ANZ Research expects the final year of the budget forecasts to show a return to surplus in 2027-28.

The budget will likely contain additional net new spending of around $A2.5 billion in 2023-24, $A10 billion in 2024-25 and $A5 billion per year beyond that. These estimates of new spending exclude the Stage 3 tax cuts as they have been factored into the budget figuring for some time.

Such a degree of net new spending is consistent with ANZ Research’s previously expressed view the budget would contain a discretionary fiscal easing equivalent to around 0.25 per cent to 0.5 per cent of Australia’s gross domestic product in 2024-25. It would therefore have no impact on any of ANZ Research’s growth, inflation or interest-rate forecasts.

Of more importance will be how consumers respond to the Stage 3 tax cuts, to which consumer confidence will provide an early guide. That said, in the wake of the recent first quarter consumer price index data and the subsequent shift in market expectations for the Reserve Bank of Australia, there is likely to be a strong focus on the size of net new spending in the budget and the economic implications.

Media reports suggest the following are likely to be areas of focus in the budget: an extension of some cost-of-living relief measures (most likely for electricity prices); changes to indexation of student debt; and possible additional funding for the Future Made in Australia package (this could also include an investment allowance).

Treasury’s economic forecasts will generally be little changed relative to those contained in the December mid-year economic and fiscal outlook (MYEFO), although there should be a reasonable lift to the nominal GDP growth forecast for 2024-25.

Better

Overall, ANZ Research expects a modest improvement in the fiscal position, albeit not as large as that revealed in the 2023-24 budget or MYEFO. It also expects Treasury to forecast another surplus in 2023-24 with deficits over 2024-25 to 2026-27 and a surplus in the final out-year (2027-28).

The improvement in the fiscal position reflects a range of factors. The first is a better starting point.

The Commonwealth monthly financial statements to March suggest on a no-policy-change basis the surplus for 2023-24 would be around $A7 billion. That stronger starting point flows through into the following years, everything else equal.

Everything else isn’t equal, however. On top of that better starting point it appears likely nominal GDP growth in 2024-25 will be stronger than Treasury was expecting in the MYEFO. Nominal GDP growth is the major driver of budget revenues which means stronger revenue growth in that year.

ANZ Research also assumes the expenditure restraint forecast in the MYEFO is maintained, with the final years of the forward estimates likely to show zero real per capita growth in payments. That nonetheless leaves real per-capita spending much higher than pre-pandemic.

That expenditure restraint, and the usual assumption of solid medium-term nominal GDP growth of around 5 per cent, are likely to be critical in producing the surplus in the final budget year.

Partly offsetting that improvement is ANZ Research’s expectation the budget will contain additional net new spending of around $A2.5 billion in 2023-24, $A10 billion in 2024-25 and $A5 billion per year beyond that.

ANZ Research expects a range of savings measures and reprioritisations to help fund initiatives contained in the budget (as is usual). As macroeconomists, ANZ Research’s focus is typically on the net of the savings and new spending.

With structural pressures building on the budget across defence, aged care, health, education, the National Disability Insurance Scheme (NDIS) and interest costs, ANZ Research expects some of the measures in the budget could be targeted to reduce medium-term growth in spending (potentially in the NDIS).

Still, the medium-term budget figuring (that is, beyond 2027-28) will nonetheless likely show government spending and revenues increasing in size as a share of GDP.

Revision

Relative to the MYEFO estimates, ANZ Research expects marginal downward revisions to real GDP growth forecasts for 2023-24 and 2024-25.

The more important variable for budget revenue is nominal GDP growth, where a marginal downward revision to 2023-24 will be more than offset by an upward revision to the following year (stronger nominal growth meaning more revenue).

The unemployment rate estimate for the June quarter 2024 will likely be nudged down, with the forecasts further out unchanged. Wages growth forecasts will likely be similar to those contained in the MYEFO, although the 2024-25 estimate could be revised marginally higher.

On inflation, ANZ Research sees few changes relative to the MYEFO forecasts. For the Treasury, the higher-than-expected first-quarter CPI is offset by the lower-than-expected fourth-quarter result in 2023.

Adam Boyton is the Head of Australian Economics at ANZ

This is an edited excerpt of the ANZ Research note “2024-25 Australian Federal Budget Preview”, published April 30, 2024