Federal Budget 2023-24: Taxpayers deliver a surplus, now the Government must deliver the goods

What a difference seven months makes.

A surge in tax collections has provided space for the Government to help out the most vulnerable and move towards a surplus for 2022-23, while forecasting much healthier cash balances over the coming four years.

Almost $30 billion of this surge has come from additional company tax collections, but business didn’t get much in return.

The Government is still occupying too much of the economy’s capacity and risking contributing to inflationary pressures.

Business now needs fiscal discipline to ensure inflation isn’t higher than it needs to be, while resources are free to be used for their most efficient purpose, especially as we head into a period of slower economic growth.

The Government plans to spend more than it saved in the short term. While this will lower the out-of-pocket costs for some households by directly helping with their electricity, medicine and health bills, it will still add to aggregate demand. The pay rises for aged care workers, subsidies for energy efficient homes and higher welfare payments will boost consumer spending.

In normal times the economy would easily absorb this stimulus.

But inflation is already running at an annual rate of 7 per cent and more than one in every four dollars spent in the Australian economy is by a state, territory, local or federal government. The Budget measures in themselves won’t trigger a rate hike, but the Reserve Bank will need to consider the additional spending in its inflation view.

With the focus firmly on helping the household sector given the rising cost of living, the productivity enhancing reforms that would in themselves ensure the Budget remains on a good long-term footing were absent.

Encouragingly, this Budget did introduce some new policies to add to the skills base of the economy, including an important measure to boost the childcare workforce. There were measures to encourage hydrogen production at the start-up phase, enabling business to leverage cost competitive renewable energy.

Equally encouraging were policy adjustments that have narrowed the structural budget deficit from around 2 per cent of GDP per year at the last budget update, to less than 1 per cent of GDP by 2024-25.

That puts the budget in a more sustainable position. But deeper cuts to spending and braver revenue raising measures would have enabled the Government to pay off debt faster, invest more in sustainable, inclusive pro-growth policies while also rebuilding the fiscal buffer needed to protect the economy from future emergencies.

The taxpayer propels revenue forward

Taxpayers are expected to add an extra $42 billion to government revenues in 2023-24 compared to the last Budget seven months ago, with economic conditions and commodity prices much stronger than expected. Almost $30 billion of that was from additional company tax collections and $15 billion from personal income taxpayers. Superannuation tax estimates were revised down and there were smaller variations in other taxes too.

What it means is that the Government’s last estimate of net debt has been lowered to $575 billion on 2023-24, from $634 billion in the October Budget. And despite rising interest rates, net interest payment estimates for 2023-24 were lowered by $3.2 billion to $13.4 billion. By 2025-26, the net debt estimate is $102 billion lower and net interest payments are $5.2 billion lower.

This change in fortunes illustrates how powerful an economic upswing – and inflation – is in improving the fiscal balance. Seven months of good economic conditions is worth years of tweaking policy settings.

It also highlights how beneficial it is for the Government to put in place the best possible policy settings for the private sector to grow.

Policy formulated to minimise inflationary impact

The budget reveals that policy spending decisions add $15 billion over the rest of the current and next financial year. But to offset this, only an extra $1.9 billion in higher revenue is planned. That means the Government is adding a net $13.8 billion of discretionary policy into the economy over the next 14 months.

The Government argues that three of its policies – in particular bill relief on electricity, medicines and GP visits – will take 0.75 percentage points off inflation in 2023-24. However, inflation was revised down by only 0.25 percentage points in 2023-24 from the October Budget. We'd assess other policies as inflationary at the margin. The Government forecasts inflation falling back to the 2 to 3 per cent target band faster than the Reserve Bank, which expects annual inflation to be at 6.3 per cent in the year to the June quarter and then 3 per cent in the year to the June quarter 2025.

Cash balance estimates improve

The underlying cash balance estimates improved significantly from the October Budget. The $36.9 billion deficit projection for 2022-23 was revised to a modest $4.2 billion surplus – the first in 15 years – through a combination of higher company and personal income tax receipts and conservative commodity price forecasts. The surplus projection ends there, as positive cyclical forces fade and the economy slows.

The position of the Budget is expected to worsen after 2024-25 as tax receipts moderate, along with spending pressures across the forward estimates.
The deficits however remain lower across the forecast period compared to the October Budget, improving by a total $125.9 billion from 2022-23 through to the 2026-27 year.

Debt down

The improved underlying cash balance has been accompanied by a significant downward revision to net debt, along with a step down in interest costs. Net debt has been revised down over the forecast period due to decreased borrowing requirements. But net debt remains elevated given the level of COVID-19 support in 2020 and 2021.

However, from 2023-24 net interest payments are expected to rise, reaching 0.8 per cent of GDP by 2025-26, down from 1 per cent of GDP in the October Budget. The Government has also been able to issue new debt at a slightly lower rate since October, with the assumed yield on 10-year government bonds revised down from 3.8 per cent at the October Budget to 3.4 per cent over the forward estimates. This was driven by the moderation in inflation and cash rate expectations.

Economic forecasts

Growth estimates for the current financial year have remained unchanged with the Treasury expecting a 3.25 per cent growth rate in the current financial year. This seems optimistic to us, given National Accounts data indicated a 2.7 per cent increase in the year to the December quarter, and household consumption is expected to weaken further as interest rates and cost of living pressures remain elevated.

In 2023-24, Treasury forecasts are consistent with Reserve Bank forecasts and are unchanged from the October Budget. A slowdown to 1.5 per cent is expected. In 2024-25, GDP is expected to pick up again to 2.25 per cent. The Reserve Bank has a relatively similar forecast at 2.1 per cent.

The unemployment rate was revised down for this financial year given the ongoing strength in the labour market. It is forecast to be 3.5 per cent in the June quarter, unchanged from the latest March data. The unemployment rate is forecast to peak at 4.5 per cent in 2024-25, rather than 2023-24 as expected in the October Budget. This would be slightly above Treasury’s estimate of the Non-accelerating Inflation Rate of Unemployment (NAIRU) of 4.25 per cent.

The forecasts for inflation have changed compared to Treasury’s October forecasts and it is now expected to be a little higher this financial year but come down quicker thereafter. Inflation is expected to slow down from the current annual growth rate of 7 per cent to 6 per cent by June. It is then expected to moderate to 3.25 per cent by 2023-24 and 2.75 per cent the year after. This relies on Treasury’s assumption that the Government’s Energy Price Relief Plan and other cost of living measures reduces inflation next financial year.

Wages forecasts remain unchanged for this financial year. The annual growth rate of the Wage Price Index (WPI) is forecast to increase from 3.3 per cent in the year to December quarter 2022 to 3.75 per cent in June this year. Treasury forecasts wages growth to further pick up to 4 per cent in 2023-24 (compared to 3.75 per cent in the October Budget) before returning to 3.25 per cent the year after. The combination of lower-than-expected inflation and higher-than-expected wages means an earlier return to positive real wages.

The Budget entails a substantial upward revision in population growth, which is now expected to reach 2 per cent this financial year, 1.7 per cent in 2023-24 and 1.5 per cent in 2024-25. By comparison, back in October, Treasury expected population growth to be at 1.4 per cent both this and next financial year. The upward revision stems from stronger-than-expected net overseas migration since international borders re-opened.

After revising productivity growth down in the October Budget, Treasury left the productivity assumptions unchanged at 1.2 per cent which is below the long run average growth rate of 1.5 per cent.