Further improvement to the economic outlook, particularly the labour market, is expected to drive deficits lower across the government’s forward estimates. Relative to the Mid-Year Economic and Fiscal Outlook (MYEFO) in December, ANZ Research expects the deficit to be about $A80 billion lower over the five years from 2021-22. An expected lift in discretionary policy spending will only partially offset the strong improvement.
Since MYEFO, there are already signs the deficit is likely to be revised lower this financial year. The December monthly financial statements showed the underlying cash deficit in one month was running $A8.5 billion lower than forecast.
In addition, iron ore prices have been averaging well above the MYEFO assumption. Swings in commodity prices can significantly impact company tax collections. Treasury is likely to maintain its assumption iron ore prices fall to $US55 a tonne and stay there over the forecast period. But ANZ Research expects it to push out, from June 2022, the timing of when prices are likely to reach this level. This change combined with the higher prices observed should see the forecast of company tax collections lift meaningfully.
The labour market outlook is likely to see solid improvements. The Reserve Bank of Australia (RBA) recently cut its unemployment rate forecasts by 0.5 percentage points in 2022 and 0.25 percentage points in in 2023. Given the surprising jobs strength in December, and resilience in January, it seems likely Treasury will further revise those numbers.
An improvement to the labour market alone will materially lift the forecasts in the federal budget as labour affects both unemployment benefits and individual tax receipts (the largest revenue source).
Altogether, the improvement to the economic parameters should see the deficit improved by around $A90 to $A110 billion across the forward estimates.
The forecast $A15 to $A20 billion new policy spending is in addition to the $A8 billion worth of non-COVID related spending that was taken at MYEFO but not announced.
A large chunk of the additional spending to be announced is expected to come from an extension of the low-and middle-income tax offset, currently set to expire in 2021-22. The offset was introduced in the 2019-20 budget and has since been extended twice.
Treasury has previously estimated the policy to cost almost $A8 billion per year. Given the timing of the tax refund, an extension of the policy to 2022-23 will hit the budget bottom line in 2023-24.
In terms of policy announcements that we know of since MYEFO, there has been around $A2.3 billion worth of spending, including policies for payments to aged-care workers. ANZ Research expects more announcements over the coming weeks as the budget draws closer.
Hayden Dimes is a Market Economist & David Plank is Head of Australian Economics at ANZ
This article was originally published on ANZ’s Institutional Insights website