29 Mar. 2022
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Federal Budget 2022: Reform comes second to electioneering

By Cherelle Murphy

EY Oceania Chief Economist

Mother of teen twins. Economist. Peddler of my profession, especially to women and girls.

29 Mar. 2022

From a business point of view, the 2022-23 budget had two tasks. One was to avoid creating unwanted demand that might push the Reserve Bank of Australia (RBA) to raise rates sooner – or push them higher – and two was to unlock supply constraints to increase the productive capacity of the economy.

A perfect score would have been given for a budget that avoided price pressure while giving business the best platform from which to be as productive as possible. These policies would in turn would lift our GDP potential, make the COVID-19 debt easier to pay off and help address growing demand for government funded health, disability, aged care and defence; particularly important given our ageing population and a geopolitically uncertain world.

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On this basis, we give Treasurer Frydenberg a six out of 10.

There were several welcome policies that will give more incentives to work and help more people into training, both of which make it easier to do business.

The improved paid parental scheme will support workforce participation by giving parents more flexibility about how they split their work commitments and greater flexibility for young families.

When the apprenticeship wage subsidy comes to an end in the second half of this year, the Australian Apprenticeships Incentive System will be introduced to support apprentices in priority trades. Help for the most disadvantaged youth to find work will come from ReBoot and indigenous workers will benefit from a $636 million Rangers Program.

The technology investment boost will give $1 billion in tax relief over four years to small businesses that invest more in digital products and $550 million is available to help them upskill their employees. Reducing red tape for employee share schemes will make it easier for Australia’s budding technology companies to be globally competitive in attracting and retaining skilled employees.

Additional infrastructure commitments will all slowly add to the economy’s capacity reducing bottlenecks and travel times through grants to State and Territory governments.

Ultimately, in this budget, Australian businesses were stuck on the sidelines calling for game changing rules to tackle the very real challenges they face with supply blockages, a lack of skilled staff and a global economy that is decarbonising around us.

Cost of living dominates the agenda

The one-off $420 cost of living tax offset and $250 payment for those on income support adds up to $4.1 billion across the economy, and while it may seem like a large sum, it’s equivalent to what Australians spend on cafes, restaurants and takeaways in the space of a month.

Although the temporary cut to the fuel excise will lower the price of petrol and therefore inflation at the headline level, the savings will be spent elsewhere and we can’t see it having much of a deflationary impact.

That’s not to say supporting low-and-middle income households is bad policy. It’s a good way to deal with higher food and fuel prices while real wages are falling, and ensures most households are not left behind.

While businesses are likely to welcome this cash hand out, it could have been offset by tighter spending policy elsewhere so as to avoid making the RBA’s job harder.

Substantive tax reform goes missing again

We deduct a point for the absence of substantive tax reform to help give businesses confidence to invest as we shift gears from emergency COVID-19 settings. There are plenty of bad policies floating around from successive budgets that the government could cut.

As Ken Henry told us in 2009, the architecture of the tax and transfer system can have a major impact on our productivity and workforce participation. Policies that provide incentives to enhance international competitiveness, encourage investment in innovation and targeted incentives for critical and essential services such as health and sustainability projects, can encourage businesses to invest.

Measures to address housing affordability are similarly disappointing. While additional funding for affordable housing is welcome, much of the housing policy was limited to a few piece-meal demand side policies. The problem is that none of these measures address the supply problem at core of the housing affordability issue, a clear missed opportunity.

Limited support for decarbonisation initiatives

Despite broadening the patent box to low emissions tech, there was a missed opportunity for Australia to act now to future proof our economy. The policies fall short of those needed to drive investment in developing and implementing new technologies, commercialising research and development and maximizing Australia’s advantages in clean and new energy sources which could be a significant boost to our GDP as well as carbon proofing our economy.

The road to budget repair begins – smaller deficits and less debt

The country’s strong labour market outcomes have driven both a large upward revision in personal income taxes and a decline in unemployment benefits, while higher commodity prices have delivered an improved outlook for company profits and the associated tax take.

Better than expected household consumption has led to higher GST receipts across the projection period – a welcome increase in revenue for the State governments which total $11.5 billion over the 4 years to 2025-26.

These strong economic outcomes – with the underlying cash deficit now expected to be at $78 billion in 2022-23 - have made it possible for the Budget to transition to its next phase of its fiscal strategy. This is a truly remarkable outcome, a substantial improvement in the underlying cash deficit of $20.9 billion compared to the Mid-Year Economic and Fiscal Outlook (MYEFO). Emergency stimulus is no longer warranted, and repair has rightly begun.

The stronger budget bottom line has seen net debt also improve, though it remains at record levels. The outlook for net debt has improved right across the projection period and is now expected to peak at 33.1 per cent of GDP in 2024-25, down from 37.4 per cent in the MYEFO in 2024-25.

Despite record net debt and Treasury’s expectation for higher interest rates – the yield curve for government bonds has been revised up markedly since the MYEFO - net interest payments as a share of GDP remain low and manageable, welcome news for intergenerational equity. 

Net interest payments remain low at 0.7 per cent of GDP to 2024-25, unchanged from MYEFO, and are well below historical levels with net interest payments hitting 1.7 per cent of GDP in the 1990s. 

A small deduction to our score on the budget comes from spending around of a third of the projected windfall gains from an unexpectedly strong economy and high commodity prices over the next three years. 

This means that although the underlying cash deficit projections are smaller than expected, they could have been smaller still, and the Government’s debt could have been paid off faster.

An economy operating at its potential for the first time in a decade

There is no doubt the economy is strong and rising commodity prices in global markets have helped lift national income. The economic forecasts paint a picture of an economy running at its potential, with no deficiency in demand, low unemployment, accelerating wages growth and the threat of high inflation.

The level of nominal GDP, the size of the overall economic pie, is expected to be permanently higher compared to MYEFO. In the near term, much of this reflects higher non-rural commodity prices, while in the later years it reflects stronger output, a higher domestic price level and the expectation that more of the labour market will be utilised.

The forecast for economic growth was raised to 4.25 per cent for 2021-22 from 3.75 per cent in MYEFO.

The unemployment rate is now expected to fall to 3.75 per cent by 2022-23 – well below the MYEFO forecast of 4.5 per cent made less than 5 months ago. A 3.75 per cent unemployment rate would be the lowest since 1974 and below Treasury’s assumed full-employment rate of 4.25 per cent.

This will undoubtedly send alarm bells ringing for employers who are already feeling the constraints in the labour market at four per cent unemployment, however, hopefully this will be offset by training and incentives to bring more workers back into the labour market.

The exceptionally strong labour market conditions are expected to translate into stronger wage growth over time. The Wage Price Index is now expected to grow by 3.25 per cent by 2022-23, 0.5 percentage points faster than expected in the MYEFO at what would be the highest rate since 2012. 

Also connected to the tight labour market and supply side capacity constraints, inflation is expected to accelerate, in 2021-22 reaching 4.25 per cent, before unwinding steadily to 2.75 per cent by 2023-24. High inflation matched with moderate wage growth means that real wages are expected to contract this financial year. 

Consumers will feel this outcome as a decline in their standards of living and something that we should all be wary of.

We’re also seeing a welcome lift in population growth, which is expected to reach 1.3 per cent by 2023-24, driven by a lift in overseas migration. The lift in population growth is welcome, as the current very low rate of population growth is a real hand brake on Australia’s economic potential through keeping the labour market constrained.

Private sector’s turn to do the heavy lifting

The economic picture is bright, and the private sector is clearly taking back its role as the growth driver in the economy, supported by strong balance sheets across households and businesses.

This is reflected in Treasury’s estimates with private sector demand expected to accelerate to 5.75 per cent in 2022-23, as public demand slows to 1.25 per cent from 7.25 per cent in 2021-22.

While the message to business is clear, the question that we’re all waiting for an answer to is whether the Government has done enough in this budget to give business the platform to do this heavy lifting.

At first glance, we’d say no, however, we remain optimistic that the Federal Election will provide a platform for a contest of ideas to help build a platform that supports long term productivity and growth in the economy through measures that address the supply side constraints we all face.


Ultimately, this budget was a missed opportunity to put in place the transformative architecture that is necessary to prepare Australian business for the significant changes they face. Businesses have been left stuck on the sidelines calling for game changing rules to tackle the very real challenges they face with supply blockages, a lack of skilled staff and a global economy that is decarbonising around us.

About this article

By Cherelle Murphy

EY Oceania Chief Economist

Mother of teen twins. Economist. Peddler of my profession, especially to women and girls.