BUDGET 2022: a better bottom line

Expect the 2022-23 Federal Budget to show a substantial improvement in Australia’s fiscal position, on the back of a solid upwards revision in the country’s economic outlook.

ANZ Research estimates the deficit in 2021-22 will be reduced by $A20 billion to $A79 billion compared to the mid-year outlook (MYEFO) – an improvement from $A14 billion to $A85 billion in our February forecast.

In 2022-23 the expected improvement in the deficit will reach $A24 billion, to around $A75 billion. The improvement over the five years from 2021-22 is expected to be around $A90 billion - up from our previous expectation of around $A80 billion.

Per our February update, such a result will serve as a break from a pattern of fiscal improvement from the economic outlook being ‘spent’ in various ways.

ANZ deficit forecasts relative to MYEFO

* The 2025-26 UCB was a medium-term projection at MYEFO, so was not explicitly published. | Source: MYEFO 2021-22, ANZ Research

The federal government has already announced a range of policies included in the budget. ANZ Research thinks there is more spending to come, and anticipates new spending worth around $A25 billion over the five years, up from $A15 billion to $A20 billion previously.

Shift

In a pre-budget speech last week, Treasurer Josh Frydenberg confirmed a shift in the fiscal strategy in the upcoming budget. Specifically, the government will move to rebuilding the fiscal buffers.

Critically, the Treasurer sees economic growth as the driver of smaller deficits and lower debt, rather than fiscal austerity. This suggests the government is likely to allow the stronger economic outlook to largely flow through to the bottom line.

This contrasts with the recent pattern of spending the fiscal improvement from positive revisions to the economic outlook.

Sustained commodity prices and new collections data suggest the overall improvement is likely to be larger than ANZ Research had previously expected, even with some additional spending factored in.

Though the improvement to the bottom line from parameter variations is larger than expected, some of this will be offset by more spending than we had previously factored in.

There is expected be a range of measures in the budget to help with the cost of living. Some sort of freeze to fuel excise and a one-off payment appear probable.

In addition, ANZ Research continues to expect an extension to the low and middle-income tax offset (LMITO), currently set to expire in 2021-22. Treasury had previously estimated the cost of this policy to be around $A8 billion.

Combined, ANZ Research still see economic parameter improvements materially improving the bottom line, despite what will be a decent amount of new spending. By way of comparison, the last pre-election budget in 2019 announced $A10.4 billion of new policy.

Still stimulatory

If ANZ Research’s fiscal estimates are broadly correct, this budget will represent a relatively sharp tightening in fiscal policy, with the spending-to-GDP ratio falling quickly.

However, this still represents historically elevated levels of spending as a share of GDP. ANZ Research expects government spending as a share of GDP to be around 26.5 per cent across the forecast period, above the long average of just 25 per cent.

What’s more, this coincides with the unemployment rate currently at 4 per cent and expected to drop into the 3-percentile range imminently.

On the surface fiscal policy may appear to be tightening quite sharply, but the reality, given the strength of the economy, is this budget clearly represents stimulatory fiscal settings – just less so than previously.

Hayden Dimes is a Market Economist & David Plank is Head of Australian Economics at ANZ

This is an edited version of the ANZ Research report “A substantial improvement in the budget deficit”, published March 23, 2022.