The Australian government presented today its Mid-Year Economic and Fiscal Outlook (MYEFO) for 2023/24. Since the Treasurer handed down the 2023/24 Budget in May, revenue has come in well ahead of earlier estimates, delivering a windfall to the government that is anticipated to extend. The Treasurer in today's update indicated that 92% of the revenue upgrades will be used to lower future deficits, with the remainder directed at new spending in health and aged care and housing.
MYEFO 2023/24 | Fiscal Position
Despite headwinds to the Australian economy from slowing growth domestically and offshore, MYEFO reports that the outlook for the nation's finances has improved markedly since the May Budget. Government revenue is now projected to be $67.4bn higher over the forward estimates out to 2026/27. This has been driven by the rapid post-pandemic increase in the population (510k in 2022/23 vs 400k estimated), still-elevated commodity prices and the robust labour market. This windfall is partially offset by a cumulative (or 4-year) increase in costs of $27.8bn, largely in the major 5 items of government spending (NDIS, health, aged care, defence and debt interest). However, this still leaves the government with a net boost to forecast revenue, which it is electing to use mainly as a buffer against future budget deficits.
Accordingly, the budget is now forecast to be broadly in balance by the end of the 2023/24 financial year (-$1.1bn or 0% of GDP), an improvement from a deficit of $13.9bn (0.5% of GDP) projected back in May. The revenue windfall then allows the government to run smaller deficits through the out-years when pressure from the 'major 5' is set to intensify. The revised profile for the deficit is now: $18.8bn in 2024/25 (from $35.1bn previously), $35.1bn in 2025/26 (from $36.6bn), and $19.5bn in 2026/27 (from $28.5bn). All told, this has cut the size of the deficit projected through to 2026/27 to $74.6bn from $114.1bn anticipated in the May Budget.
MYEFO 2023/24 | Overview
The main theme in MYEFO is the sizeable upgrades expected in government revenue. As noted above, revenue upgrades total $67.4bn out to 2026/27. This almost exclusively reflects the boost from 'parameter changes' ($66.1bn), underpinned by a higher tax-take ($64.4bn). This windfall flows from a resilient economy and strong labour market (that is also larger due to population increase) that boosts the associated income tax receipts, while elevated commodity prices drive higher corporate taxes. Meanwhile, new policy decisions have added $1.2bn to the coffers, with over half of this coming via higher taxes levied on foreign investors in the housing market.
On the other side of the ledger, government payments have been marked up by $27.8bn over the forward estimates. Of this, $21.3bn is attributed to 'parameter changes' - reflecting increased spending in the NDIS and Child Care Subsidy and from the impact of higher interest rates. New policy decisions taken since the May Budget come at a cost of $6.5bn. This is headlined by additional funding to the Pharmaceuticals Benefits Scheme ($3.5bn), new housing ($0.7bn), aged care reform ($0.5bn) and support for the NDIS ($0.5bn), but a 're-profiling' of infrastructure spending has clawed back $7.4bn for the government. Overall, Treasury estimates that these measures will inject a modest net stimulus to the economy of $5.3bn over the next 4 years.
As a result of the revenue upgrades and their effect on lowering the deficit, the profile for government net debt has improved relative to expectations in the May Budget. Lower budget deficits mean the government's funding requirement is reduced, while higher bond yields have led to a fall in the market value of Australian government bonds on issue. Net debt in 2023/24 is now forecast to come in at 18.4% of GDP ($491bn), down from 22.3% of GDP ($574.9bn) previously. Over the out-years, net debt increases but on a slower trajectory than in the May Budget - reaching 20.8% of GDP in 2026/27, well down from the previous projection of 24.1% of GDP. The profile for net interest payments was little changed in MYEFO.
MYEFO 2023/24 | Economic Outlook
The baseline economic outlook from Treasury is broadly unchanged compared to the May Budget. As covered last week in the Q3 National Accounts, the Australian economy is slowing as headwinds domestically (cost-of-living pressures and higher interest rates and offshore (conflicts and uncertainty) are impacting. Still, Treasury continues to forecast a soft landing, in alignment with the RBA's outlook.
Domestic growth is anticipated to be weak in 2023/24 (1.75%) and subdued in 2024/25 (2.25%). This helps to ease inflation over the period, but a return to the midpoint of the RBA's target band is not anticipated until 2025/26. The extended timeline reflects the outlook for the labour market to remain in robust shape: the unemployment rate is seen reaching a high of 4.5% through 2024/25 into 2025/26, still a historically low level in Australia through the decades. Both the RBA and Treasury see the current pace of wages growth (4%) as the peak for the cycle.
The nominal side of the economy is supported by a deferral in the timing of the expected retracement in commodity prices (to US$60/t for iron ore; US$140 for metallurgical coal; and $US$70/t for thermal coal), by 6 months to the September quarter in 2024. This has resulted in a slower decline in the terms of trade, driving a substantial upgrade to the growth outlook in 2023/24 for nominal GDP to 4.25% from 1.25% previously.
