The underlying cash balance for 2022-23 is expected to be a deficit of $A78 billion. From there, it is forecast to improve further with the deficit narrowing to $A43.1 billion (1.6 per cent of GDP) by 2025-26. This is better than ANZ Research had expected – and it all comes from a stronger economic outlook.
Offsetting this partially is the new spending. The primary focus of this is around infrastructure and policies to ease cost-of-living pressures. The fuel excise rate will be halved for six months, while the Government announced a $A420 cost-of-living tax offset, and a $A250 payment for those on income support.
This is the first fiscal update over the last couple of years to not ‘spend’ all the gains from a stronger economic outlook. But the level of spending means fiscal policy is still providing plenty of stimulus for the economy.
The economic forecasts underpinning the Budget appear reasonable, though perhaps still a little conservative. For nominal GDP - the key parameter for the deficit - the Government’s numbers are quite a bit lower than ANZ Research’s for 2022-23.
Like ANZ and the RBA, Treasury is also forecasting a decline in the unemployment rate to historic lows. However, ANZ Research thinks unemployment will fall even more than it expects, and wages will rise faster and higher.
With the material reduction in the deficit, net debt is forecast to rise slower and peak lower than expected at MYEFO. As a share of GDP, this reduction is even larger given the improved economic outlook.
These reductions have helped to largely offset an assumed rise in borrowing costs in the Budget, given the significant move higher in bond yields since MYEFO.
The interest rate assumptions seem low, in ANZ Research’s view, and there is a risk interest costs come in higher than Budget forecasts. Nevertheless, the burden of the interest payments as a share of GDP will remain very manageable.
Hayden Dimes is a Market Economist, David Plank is Head of Australian Economics, and Felicity Emmett, Catherine Birch & Adelaide Timbrell are all Senior Economists