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Analysis: October’s Budget & Australia’s Fiscal Relativities

• Australia’s second Budget for 2022-23 will be handed down next week (7.30pm on Tuesday 25^th). Treasurer Chalmers has framed this Budget as one that will not add to inflation risks amid elevated cost-of living pressures and which occurs with a background of rising global recession risks. We do not expect any major new policy announcements but a focus on: (i) implementing major election policy promises (Childcare and Aged Care), (ii) framing the medium-term spending challenges for the budget (defence, aged care, health, the NDIS and public debt interest) and (iii) revised economic forecasts.
• There has been a dramatic improvement in Australia’s fiscal situation since November. The final budget outcome for 2021-22 was a deficit of $32bn (1.4% of GDP), considerably better than the estimates compiled in March 2022, which had pencilled in a deficit of $79.8bn (3.5% of GDP). Looking at the monthly budget run-rates reveals an even starker improvement with revenues surging since November 2021 and the monthly net balance is broadly tracking the 2018-19 profile where the deficit was almost in surplus (only a deficit of $0.7bn (0.0% of GDP).
• For 2022-23, it is probable the revised deficit forecast will be in the order of $25-30bn (or 1% of GDP) given the ongoing surge in revenues (in June, monthly budget revenues were 39.6% above pre-pandemic 2019 levels). Still conservative assumptions for iron ore and coal prices will likely mean the actual 2022-23 deficit will likely be better than what will be published on Tuesday. The PBO notes the net impact of election promises amounts to $1bn in 2022-23 and $2bn in 2023-24 which is around 0.1% of GDP. Higher yields also mean rising public debt interest costs of up to 0.6% of GDP by 2032 – and the Treasurer includes these pressures, along with pressures from defence spending, ageing, health and the NDIS as longer-term budget challenges that need to be addressed.
• Australia’s near-term fiscal situation remains quite different to what is occurring in Europe. The key to this difference is Australia’s terms of trade has risen during the pandemic and invasion of Ukraine, helping boost company profits, and in turn tax revenues. Australia’s status as a net energy exporter has meant energy bills while rising in Australia, are not increasing as dramatically as seen offshore. Gross and net debt profiles also remain comparatively favourable and a lot lower than other advanced economies, because of historical fiscal discipline by both sides of politics. Using the IMF WEO, Australia’s gross debt at 56.7% of GDP, remains below Germany (71.1%), the UK (87%) and the US (122%).
• The Budget will also contain updated macro forecasts, which will likely be an early guide to the RBA’s November forecasts which are published the week after in the RBA Board Decision (1 November) and more fully in the SoMP (4 November). The Treasurer has flagged recent floods will impact the CPI, and while not stated, may see the CPI peak higher than the previously forecast 7¾% for Q4 2022. Note the Treasury CPI forecast will not include the Q3 forecast, which is released the following day.

Chart 1: Strong revenue growth being seen

Chart 2: Net balance similar to 2019 fiscal track

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