The Australian Federal Budget 2022/23 reports an improved fiscal position on the back of the nation's strong economic recovery from the pandemic and surge in the terms of trade. New spending measures are modest with the government focusing its fiscal strategy on avoiding adding to inflationary pressures in the near term.
Federal Budget 2022/23 | Budget Position
The budget deficit for 2022/23 is forecast to come in at $36.9bn (1.5% of GDP), a sharp improvement on the deficit of $78bn anticipated in the Pre Election statement (PEFO) published back in April. This improvement largely flows from a much smaller deficit in 2021/22 ($32bn) than was earlier expected ($79.8bn) because the Australian economy outperformed key forecasts and elevated commodity prices drove the terms of trade to a record high level.
A smaller deficit is also forecast for 2023/24 at $44bn (from $56.5bn in April); however, the budget position is then anticipated to deteriorate with larger deficits seen in 2024/25 ($51.3bn) and 2025/26 ($49.6bn). The government anticipates the deficit to widen due to rising cost pressures in some of its major programs, including aged care and the National Disability Insurance Scheme.
Overall, the budget deficit for the 4 years to 2025/26 is projected to be $181.8bn, almost $43bn narrower than was forecast in the PEFO statement.
Federal Budget 2022/23 | Policy Measures
The government notes its fiscal strategy is to avoid adding to inflation pressures while at the same time starting the process of lowering the deficit. Over the 4 years to 2025/26, forecast net revenue has received a boost of $52.5bn; this budget injects only a net $9.8bn of new spending into the economy over the period. There has been a focus by the government to redirect spending commitments made by the previous government as well as bolstering tax avoidance measures, together finding some $28.5bn over the forward estimates.
New policy measures in this budget are largely those the government took to the May election. The signature policy is "Cheaper Child Care" at a 4-year cost of $4.7bn. Cost of living support is narrow coming via expansions to the Pharmaceutical Benefits Scheme, lowering the cost of medicines (4-year cost $1.4bn). The paid parental leave scheme will be gradually scaled up to cost the budget an additional $0.5bn by 2025/26. The government is committing $0.35bn towards a new Housing Accord that targets 1 million affordable homes to be built over a 5-year period from 2024.
Federal Budget 2022/23 | Payments and Receipts
As a share of GDP, government payments are forecast to lower to 25.9% from 26.8% in 2021/22 reflecting the strength of the domestic economy, reducing welfare payments. However, payments are then expected to rise to 27% of GDP in 2023/24 as the economy slows and hold close to that level in the following two years.
Government receipts hit their high point in 2021/22 at 25.4% of GDP as the economy recovered and commodity prices surged. They are expected to ease back to 24.5% of GDP in 2022/23 before rebounding to 25.3% of GDP in 2023/24. In the 2024/25 and 2025/26 years, receipts are around 2ppts lower than payments in each financial year, highlighting the structural pressures on the horizon.
Alongside the strong economic recovery from the pandemic, government net debt fell from 28.6% of GDP in 2020/21 to 22.5% in 2021/22, before lifting modestly to 23% in 2022/23. Reflecting the spending pressures on the budget, the trajectory for government net debt rises to 28.5% of GDP in 2025/26.
Federal Budget 2022/23 | Economic Outlook
The domestic economic outlook forecast by Treasury is set against a deteriorating global backdrop due to intensifying headwinds from high inflation and supply disruptions impacting energy markets. The outlook for global GDP growth has been downgraded materially, slowing to 2.75% next year from 3.75% expected back in March, with notably weaker outlooks in the US, UK and euro area.
In Australia, GDP growth was downgraded modestly in 2022/23 to 3.25% ahead of a slowdown to 1.5% in 2023/24, a pace well below trend. The main factor is a weakening in household consumption growth (from 6.5% to 1.25%) reflecting a sustained period of falling real incomes and monetary policy tightening with the RBA's hiking cycle expected to top out at 3.35% on the cash rate. Growth below trend sees the forecast for the unemployment rate rise to 4.5% in 2023/24 (up from 3.75%), leading to inflation pressures coming off as the CPI eases to 3.5% and wages growth stabilises at 3.75%. Inflation is then forecast to return to the middle of the RBA's target band the following year.
