Budget 2022: a start to repair

The Australian government has released an unsurprisingly modest budget, with a focus on updating the numbers given the very different economic outlook, “reprioritisation” and a start to budget repair.

Compared to the March budget, there is just a net $A9.1 billion extra spending between 2022-23 and 2025-26, despite $A51 billion in additional revenue. The government has removed $A28.5 billion from future deficits through reprioritisation in spending, as well as increased tax enforcement.

Budget deficits are forecast to grow in the coming years, but ANZ Research thinks the estimates are based on too-pessimistic economic forecasts – in part reflecting Treasury’s usual approach to commodity price forecasts.

Though the risks around the economic outlook are considerable, critically, there is nothing in this budget that will spook the inflation hawks.

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The 2022-23 deficit is expected to be just $A36.9 billion, representing -1.5 per cent of Australia’s gross domestic product. This is largely due to an upgrade in economic parameters. The government says they are “returning 99 per cent of upgrades to tax receipts to the budget”.

Short-term ‘windfalls’ keeping deficits modest in 2021-22 and 2022-23 are replaced by structural expense pressures in the rest of the forecast period that widen the deficit but still see it at less than 2 per cent of GDP in 2025-26.

Compared with ANZ forecasts, Treasury forecasts of nominal GDP growth and employment are conservative. Whether this results in smaller deficit outcomes will depend on how the uncertain economic environment pans out - and how the government addresses spending priorities.

The total fiscal improvement of $A42.5 billion across 2022-23 to 2025-26 compared with the March budget is mostly due to sharp improvements in economic parameters.

The improvement in the underlying cash balance from economic factors is $A53.3bn across 2022-23 and 2023-24 alone. Thereafter, extra spending is the main difference between the March and October underlying cash balances.

While the budget has kept most of the revenue improvements for budget repair rather than spending, the share of GDP going to payments is still elevated compared with pre-COVID rates.

Payments as a share of GDP average 26.8 per cent between 2022-23 and 2025-26, which is above the 1999-2019 average of 25.8 per cent. This is, in part, a function of what may turn out to be pessimistic GDP forecasts.

New spending measures include $A4.7bn in childcare subsidies - estimated to be available to 96 per cent of families - $A3.0 billion for flood-related spending, and $A2.5 billion of new investment to deliver better aged care.

There is $A1.7 billion in initiatives to improve women’s safety, $A1.4 billion for new and amended medication subsidies, and $A8.1 billion over 10 years from 2022–23 for priority rail and road infrastructure projects (in addition to existing infrastructure investment).

Upside

The economic forecasts in the Budget are more conservative than ANZ forecasts, which suggests there may be upside risk to the health of the budget going forward.

However, the economic outlook is very uncertain. ANZ Research expects some upside surprises to future budget balances due to stronger income tax revenue and better terms of trade in 2022-23 and 2023-24.

ANZ Research’s unemployment-rate forecast is 0.5 percentage points lower than the budget’s in June 2023 and 0.8 percentage points lower in June 2024, with slightly stronger employment growth expected.

ANZ Research’s wage price index forecasts are marginally higher than the budget’s, and its terms of trade forecasts are more optimistic, although a solid fall in commodity prices in 2023-24 is expected.

Conservative commodity price forecasts have a substantial impact on budget estimates, which assume prices of “iron ore, metallurgical coal and thermal coal start from their recent averages in late September, and glide down over the December 2022 and March 2023 quarters to their assumed long-term fundamental price levels”.

If this “glide down” is delayed by a quarter, sensitivity analysis in the budget suggests that would lead to a “total increase in nominal GDP of $43.8 billion between 2022–23 and 2024–25, and an increase in company tax receipts of $9.9 billion over the same period”.

Downward

Net debt projections in the budget were revised sharply lower compared to the March budget. In March, net debt at the end of the 2022-23 fiscal year was projected to be $A715 billion (31.1 per cent of GDP).

This has been revised down to $A572 billion (23 per cent of GDP). The downward revision is mostly due to the combination of the reduction in expected debt issuance and the impact of higher yields on the market value of the outstanding debt.

Since net debt is measured using the market value of Australian government securities (AGS) – the decrease in their value (ie increase in their yield) has reduced their contribution to net debt.

Net debt is still projected to increase, rising to $A768.8 billion (28.5 per cent of GDP) by the end of 2025-26. And over the medium-term, the budget projects net debt as a share of GDP will rise above the previous estimates out to June 2033.

Interest payments across the forward estimates have been revised up, reflecting the rise in yields offsetting the reduction in borrowing estimates. As a share of GDP, interest payments are expected to rise to 1 per cent by 2024-25.

Adelaide Timbrell is a Senior Economist, David Plank is Head of Australian Economics, Felicity Emmett is a Senior Economist, Catherine Birch is a Senior Economist, Jack Chambers is a Senior Rates Strategist and Madeline Dunk is an Economist at ANZ