Analysis: Fiscal consolidation expected to be gradual. Election to be called in next few weeks, most likely for May 14th or 21st.
The Australian Budget is set to be unveiled next Tuesday night, ahead of the federal election that must be held on or before 21 May 2022. The election is likely to be called within two weeks of the Budget given the minimum 33-day requirement between the calling of the election and holding the election (possible election days are Saturday 7 May, 14 May or 21 May).
The result of the Federal election is likely to be of minimal significance for markets with the short and medium-term trend for bond yields and the $A, continuing to be impacted more by the global recovery from COVID, the normalisation of supply chains, inflation, and official policy rates and by the Russia/Ukraine situation. At this stage, the Opposition more comfortably leads the Government on a two-party preferred basis than was the case before the 2019 election (55-45% versus 52%-48%), but of course on that occasion, the polls got the result very wrong!
As for the Budget itself, the Government will be balancing two narratives:
The first and most important is the shift in the government’s fiscal strategy towards fiscal repair. Treasurer Frydenberg’s recent pre-Budget speech cites the importance of the “move to the next phase of our fiscal strategy, which will stabilise and reduce debt as a share of economy”. Consolidation though is only expected to be gradual with the Treasurer also noting “a sharp and sudden tightening in the fiscal settings would likely be counter-productive, undermining the economic recovery”.
The second is the pre-election nature of the Budget given the election must be held on or before 21 May 2022. There is some scope for additional spending within the context of fiscal repair given the automatic stabilisers continue to add to revenues (monthly figures show the 2021/22 YTD deficit to January is running $13.2bn better than forecast at MYEFO in December), while even at MYEFO, the government had an extra $16bn in “decisions taken but not yet announced and not for publication”.
Forecasting Budgets is notoriously difficult. For the underlying cash deficit, we forecast $77bn in 2022-23 (from $98.9bn), falling to $55bn in 2023-24. Such a profile would see gross debt peak lower and earlier than at MYEFO, but would still see small deficits remaining around 2% of GDP across the rest of the decade given the structural deficit in place and limited appetite for aggressive consolidation.
With neither party signalling a focus on absolute debt reduction, whichever party wins government in May the issue of fiscal repair will remain. Importantly this is not an issue for Australia’s AAA credit rating given persistent current account surpluses have eased pressure on the need for the government to balance its budget from a AAA ratings perspective according to S&P. Deficits in the order of 2.5% of GDP are said to be consistent with a AAA credit rating. In the near-term cost of living pressures look like to be the focus of both voters and the government for now.
Chart 1: Economy has performed much better than expected than in MYEFO