2022 Federal Budget: NAB Economic Commentary

Cost of living measures were a centerpiece of the 2022 Federal Budget, with petrol, tax breaks and payments for pensioners on the agenda.

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Group Economics overview of the budget

With the looming election and the promise by the Opposition of a new budget if elected, there is considerable uncertainty over how many of the announced measures will be implemented. We also don’t know what else the Government will announce in the lead up to the election (although the Contingency Reserve which widens to $15.4 billion by 2025-26 is pointing to some further announcements).

That said, the focus of spending was largely as expected. Cost of living measures were a centre piece, including halving the petrol excise for 6 months (worth 22c per litre), an extra $420 on the LMITO, and one-off special payment of around $250 for pensioners and welfare recipients.

Planned infrastructure spending was upped by $17.9 billion – largely concentrated on roads and rail. A new Regional Investment package of at least $11 billion was announced as well as significant new spending on defence – worth $270 billion over 1o years. Elsewhere there were incentives for investment in agriculture, medical manufacturing and digital.

Other measures included tax benefits for SMEs to invest in training and technology and an extension and expansion on home loan guarantees for housing.

Our analysis of the Structural Budget impulse using OECD methodology points to, very little structural tightening over the forward estimates – with the structural position improving by only 2% of GDP over the next 3 years. This sees the structural deficit still around 5% of GDP by 2024-25. Indeed, the small reduction in the headline Budget was largely brought about by a better economy – we think more could have been done.

In looking at the near-term trends, the fiscal situation is once again driven by the expense side rather than revenue. Indeed, compared to MYEFO there is little change.

Overall, we have no problem with the focus on maintaining the support for economic growth but we see the scope for more structural/productivity enhancing measures to have been included. Further measures that cut red tape, reform taxation and provide greater support for renewable energy would have been welcomed. This budget also does not change expectations for monetary policy – i.e., the RBA will move soon to moderately increase rates (we expect that process to start by August this year).

Fiscal Outcome

The underlying cash balance for 2022-23 is estimated at $78 billion (or around 3.4% of GDP), while around $47 billion or 1.9% of GDP by 2023-24. Net debt is now expected to peak at around 33.1% of GDP by 2024-25 much lower and earlier than previously expected. That said, a return to surplus looks many years away.

Economic Outlook

Both we and the Treasury have similar views on the economic outlook. We see growth of around 3.8% in 2022-23 (Treasury has 3.5%). For 2023-24 we have 2.2% and they have 2.5%. Our expectations for consumption and investment are somewhat more modest in the short term than the Treasury’s forecasts, but on the other hand we see unemployment lower for the near term at 3.5%.

Further out, Treasury see unemployment falling to 3.75% in 2023-24 – we are at 3.5% – and then they see unemployment rising back up to 4% in 2024. They also forecast less sustained business investment growth. Regardless, we share a positive outlook for the near term, albeit coloured by elevated inflation and ongoing virus and geopolitical risks.

Financial Markets

S&P has indicated that with Australia running a current account surplus in recent years, Australia’s AAA rating is secured by a return to a budget deficit of around 2.5% of GDP, which this Budget presents.

For further details, please see the 2022-23 Budget Economic Commentary