Budget 2022: of spillovers & slowdowns

The United Kingdom’s mini budget sent shockwaves through the market in September. Australian Treasurer Jim Chalmers labelled the fallout a “cautionary tale” of what can happen when the balance between monetary and fiscal policy goes wrong.

“The deterioration in the underlying balance in 2022-23 reflects the spillover of 2021-22 expenditure and higher inflation, rather than a swathe of new policy measures.”

In the wake of that, ANZ Research expects Labor’s first budget to emphasise the transparency and credibility of the figures — and limit additional policy measures.

The final underlying cash balance for 2021-22 was around $A48 billion better than expected in the March budget. While some of the improvement came from better-than-expected labour market and revenue outcomes (of around $A30 billion), there were also delays in spending of around $A10 billion, which add to the expense side of the 2022-23 budget.

The Treasurer warned this “windfall” result was temporary and Australians “need to be realistic about the fiscal situation”. 

Revenue growth from 2021-22 to 2022-23 is expected to be around 4 per cent to 5 per cent. While new spending policies for 2022-23 are expected to be limited, the budget will include the government’s pre-election commitments, some modest cost-of-living support and additional COVID relief. Some of these initiatives are likely to be funded by reallocation from existing programs.

The deterioration in the underlying balance in 2022-23 reflects the spillover of 2021-22 expenditure and higher inflation rather than a swathe of new policy measures.

Expense pressures and a slowdown in nominal GDP growth will lead to increased budget deficits beyond 2022-23. Key structural expenses after June 2023, including the NDIS, health, aged care, defence spending and higher interest costs on debt, will keep the budget in considerable deficit through the forecast period.

Strong prices

Very strong commodity prices and rapid employment growth have supported tax revenue through 2021-22. While these are expected to abate in the coming years, ANZ Research thinks the budget will likely be on the conservative side for revenue estimations.

ANZ Research’s estimates of budget revenue and the underlying cash balance are based on the expected Treasury forecast for nominal GDP. But it is expected the updated forecasts from Treasury will be lower than ANZ Research’s forecasts of nominal GDP over the next few years. This suggests the deficit published in the 2022-23 budget is likely to be on the pessimistic side.

Nominal GDP growth forecasts (%)

Treasury has already revised its unemployment forecast down to reflect the rapid tightening of the labour market in recent months. Like the Treasury, ANZ Research expects unemployment to drift up between now and the end of 2024 as rate hikes flow through to labour market dynamics. But before that ANZ Research thinks the unemployment rate has further to fall.

As a result, Treasury’s forecast is higher, for the unemployment rate, out to at least the end of 2024. If Treasury is overestimating unemployment this may see increases to estimated tax revenue after the 2022-23 budget.

ANZ Research expects commodity prices to soften over the next year. This will reduce the tax income from commodities which has been a relatively bright fiscal spot.

Treasury’s July ministerial statement assumed the iron ore spot price would decline to $US55 a tonne by December 2022.This forecast decline will likely be pushed out a few months, boosting the forecast for nominal GDP relative to the July update.

Lock down commitments

The new government will be keen to capitalise on its first budget by locking down pre-election commitments and finding some spending they can re-prioritise. This re-prioritisation will help fund some new commitments but will be limited and longer-term structural costs will pose a challenge for the fiscal outlook.

ANZ Research expects the Labor Party to make considerable changes to capital outlays but these won’t directly impact the underlying cash balance (though the changes will impact the track for public debt and hence interest expenses over time).

The recent fiscal outcome for 2021-22 showed expenses fell $A16.5 billion and total cash payments decreased by $A20.1 billion compared with the March Budget. This was on the back of a fall in welfare payments and delays in planned spending on things such as infrastructure, vaccines and protective equipment.

Despite the positive 2021-22 budget figure, the result was masked by an inability to spend on planned items and programs. The Finance Minister said about $A10 billion of this spending will flow into 2022-23. Higher interest payments and rising inflation will also add pressure.

Stronger than expected inflation will feed through to benefits and significant cost pressures on the health sector will increase state demands for additional funding. The government’s pre-election commitments will add $A1.1 billion to the bottom line in 2022-23.

Other new measures will also feature but are likely to be partly funded by re-prioritising existing spending. As such, ANZ Research thinks spending in 2022-23 will increase by $A25 billion to $A30 billion compared with the March budget.

Spending is expected to grow over the remaining forecast period. Between 2023-24 and 2025-26, ANZ Research thinks the Government will spend over $A60 billion on top of the March budget. The step-up in spending reflects the impact of election commitments like the $A5.4 billion childcare package which comes into play in July 2023, and ongoing structural costs.               

The growing cost of debt will add pressure to the budget bottom line with the Treasurer noting more than $A13 billion in additional interest payments will be needed to service debt obligations over the forward estimates. The government will also be keen to update expenses to be more ‘realistic’ about the cost of existing programs compared with what was in the March budget.

Adelaide Timbrell is a Senior Economist & Madeline Dunk is an Economist at ANZ

This story was originally publishing on ANZ Institutional Insights page and is an edited version of the ANZ Research report “Preview: Australian Federal Budget 2022-23”, published October 5, 2022.