Below trend growth to continue
Insight
May 5, 2023
AMW – Budget could be close to a surplus this year
The federal budget has substantially improved over the past year to the extent that the 2022-23 Final Budget Outcome could be in surplus.
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Budget could be close to a surplus this year
- The federal budget has substantially improved over the past year to the extent that the 2022-23 Final Budget Outcome could be in surplus. The Monthly Financial Statements show the underlying cash balance at -$11.2bn March YTD, well ahead of the $34.5bn budget profile. Given months of May and June are usually well cash flow positive, a surplus of $0-5bn is possible for 2022-23. NAB’s house view though is a small deficit of around -$5bn, still a vast improvement on the -36.9bn initial forecast.
- The improvement in the budget is coming from two sources. The first is employment growth has been incredibly strong. NAB’s forecasts that incorporate actuals to date have employment growth of 3.8% in 2022-23, well up on the 1¾% forecast in the 2022-23 Budget. Commodity prices have also remained elevated relative to normally conservative budget assumptions.
- Looking to the 2023-24 Budget that is handed down next week (7.30pm on Tuesday 9 May), we see the Budget in a deficit of around -$20bn (1% of GDP) for 2023-24 (but still down from prior forecasts of -44bn) given conservative commodity price assumptions and a forecast rise in unemployment, and remaining near -$20-30bn in the outyears amid medium-term challenges (defence, aged care, health, and NDIS).
- Australia’s near-term fiscal situation remains quite different to other countries given Australia’s terms of trade rose during the pandemic and as Russia invaded Ukraine, and has remained elevated thereafter on expectations of Chinese demand rebounding following China’s pivot to living with Covid late last year. Population growth has also rebounded more quickly in Australia than in other countries.
- Gross and net debt profiles in Australia remain comparatively favourable and lower than other advanced economies, because of historical fiscal discipline. Using the IMF WEO projections for 2023, Australia’s gross debt at 59.4% of GDP, remains well below Germany (67.2%), the UK (106.2%) and the US (122.2% of GDP).
- The Budget will also contain updated macro forecasts, though note these are published after this week’s RBA SoMP. We will be looking closely at the population growth assumptions given the surprisingly sharp rebound in population growth and comments from Treasurer Chalmers suggesting net migration would reach 650,000 over 2023-23 and 2023-24.
