The Australian Federal Budget 2023/24 capitalises on a substantial uplift in revenue from stronger-than-expected economic parameters, using the windfall to provide some cost-of-living support and to lower forecast deficits. A net $20.6bn of new measures have been announced, which broadly look to carry two-sided risks to the inflation outlook. In particular, a $1.5bn package for energy bill relief will push down on inflation, but that could free up household cash flow for additional spending.
Federal Budget 2023/24 | Budget Position
A revenue windfall has improved Australia's fiscal position significantly since the previous budget in October. Elevated commodity prices and strong labour market conditions have driven a substantial uplift in government revenue, swinging the budget into surplus this financial year for the first time since 2007/08 and lowering the deficits forecast in the years thereafter.
A surplus of $4.2bn (0.2% of GDP) is now forecast for 2022/23, a $41.1bn improvement from the deficit of $36.9bn anticipated back in October. The budget is expected to fall back into deficit in 2023/24 as the revenue windfall moderates, exposing the budget to existing structural pressures. The deficit for 2023/24 is expected to be -$13.9bn (-0.5% of GDP), though this has improved from -$44bn forecast in October, reflecting the stronger starting point from the 2022/23 surplus.
Structural pressures on the budget from areas such as health and aged care, defence spending and interest payments lead to wider deficits over the forward estimates. Deficits of 1.3% of GDP are forecast in 2024/25 and 2025/26 before easing back to a deficit of 1% of GDP in 2026/27.
Federal Budget 2023/24 | Policy Measures
New policy measures announced in this budget focus on providing cost-of-living support. The net effect of the new measures on the economy is $12bn in 2023/24 and $20.6bn over the 5 years to 2026/27. These measures have been funded out of the government's revenue windfall; tax receipts (excluding GST) have been revised up by $114.2bn from the October budget out to 2025/26. The new measures, therefore, are using 18% of this revenue windfall, with the Treasurer banking the remaining 82%.
The cost of new policy decisions is $13.8bn in 2023/24 for a total of $42.6bn through 2026/27. Major measures include: i) increased funding for Medicare ($5.7bn), ii) higher working-age payments (including JobSeeker) ($4.9bn), iii) rental assistance payments ($2.7bn), iv) higher single parent support payments ($1.9bn) and v) energy bill relief ($1.5bn).
To partly offset the cost of these measures, the Treasurer will levy $19.1bn of new taxes out to 2026/27. The major initiatives are: i) increased tax compliance measures ($9.1bn), ii) higher tobacco excise ($3.3bn), iii) changes to the Petroleum Resource Rent Tax ($2.4bn), and iv) reductions to superannuation tax concessions ($1bn).
Federal Budget 2023/24 | Payments and Receipts and Debt Outlook
Factoring in the upgrades to the economic parameters since the October budget, the profile for government receipts has been revised up and revised down for payments. In 2021/22, payments as a share of GDP were 26.7%; they are now expected to fall to 24.8% in 2022/23, outperforming the October budget forecast of 25.9%. But payments then rebound to 26.5% of GDP in 2023/24 (27% previously) and remain elevated thereafter due to structural pressures at 26.8% in 2024/25, 26.6% in 2025/26 and 26.1% in 2026/27.
Government receipts are expected to come in at 25% of GDP in 2022/23 compared to the previous estimate for 24.5%, equating to an uplift in revenue of $28.4bn. Receipts are then expected to rise to 25.9% of GDP in 2023/24 (up from 25.3% previously). Thereafter, receipts ease to 25.4% of GDP in 2024/25 and then to 25.2% for the following couple of financial years, which reflects commodity prices correcting and softer labour market conditions.
There has been a substantial reduction in the debt profile since the October budget. In October, deficits were expected to total $235.8bn to 2026/27, but stronger economic parameters have subsequently cut total deficits over the period to $109.9bn. As a result, the government's funding requirement is significantly reduced. Net debt for 2022/23 was revised down to 21.6% of GDP from 23% previously. In the following years, net debt rises but on a more gradual trajectory than previously expected. The AOFM estimates bond issuance in 2023/24 will be $75bn, slightly lower than in 2022/23 ($80bn).
Federal Budget 2023/24 | Economic Outlook
Australia's economic outlook, as forecast by Treasury, is little changed from October. GDP growth is expected to slow below trend this year reflecting headwinds from offshore and the adjustment in household consumption to cost-of-living pressures and higher interest rates. Rapid post-pandemic population growth from net overseas migration will underpin growth. Meanwhile, the tailwinds from elevated commodity prices are assumed to last for longer, as Treasury pushed back the timing for the correction in commodities prices to Q1 2024.
Inflation pressures are expected to ease next financial year, in part helped by the Government's energy bill relief, with headline inflation in 2023/24 revised down from 3.5% to 3.25%. However, it is not until 2024/25 when inflation is back inside the RBA's 2-3% target band.
A gradual softening in the labour market is anticipated to lift the unemployment rate from 3.5% currently to a peak of 4.5% by 2024/25. However, wages growth is expected to strengthen into next year, rising to 4% and thus restoring positive real wages growth.
