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.