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BUDGET 2022: onwards & upwards

Market Economist & Head of Australian Economics, ANZ

2022-02-28 00:00

The 2022-23 Australian Federal Budget, set for release in late March, is expected to show a sharp improvement in the country’s fiscal position, driven by the improving economic outlook. ANZ Research estimates the deficit in 2021-22 will be reduced by around $A14 billion to $A85 billion, and in 2022-23 by $A18 billion to around $A81 billion.

This will be a break from the recent pattern where the fiscal improvement from the economic outlook has been ‘spent’ in various ways.

But with a federal election around the corner, it’s unlikely the budget will see a shift towards fiscal repair. This is despite the unemployment rate being comfortably below 5 per cent, and likely to be forecast to fall below 4 per cent over the next couple of years when the budget is tabled..

It is likely however the budget will flag plans for repair later in 2022 as long as the unemployment rate moves broadly in line with forecasts. Though the government has not explicitly said how fiscal repair will occur, Treasury Secretary Steven Kennedy has said “it is important that the withdrawal of fiscal policy support is tapered”. It’s likely the government, should it be returned in the upcoming election, will eventually look to slow the growth in spending.

ANZ Research expects the federal government to announce new policy worth around $A15 billion to $A20 billion as part of the budget. The largest single policy will be the extension of the low-and middle-income tax offset to 2022-23.

Though this is a large reduction in spending compared to recent updates, it is still a lot, with the last pre-election budget in 2019 unveiling ‘only’ $A10.4 billion of new policy.

all figures $A bn

21-22 estimate

22-23 forecast

23-24 forecast

24-25 projection

25-26 projection

Underlying cash balance 

Budget 2022-23, ANZ estimates






Underlying cash balance

as at MYEFO (Dec 21)






Change (A$ bn)






* The 2025-26 UCB was a medium-term projection at MYEFO, so was not explicitly published  |  Source: MYEFO 2021-22, ANZ Research


Further improvement to the economic outlook, particularly the labour market, is expected to drive deficits lower across the government’s forward estimates. Relative to Mid-Year Economic and Fiscal Outlook (MYEFO) in December, ANZ Research expects the deficit to be about $A80 billion lower over the five years from 2021-22. An expected lift in discretionary policy spending will only partially offset the strong improvement.

Since MYEFO, there are already signs the deficit is likely to be revised lower this financial year. The December monthly financial statements showed the underlying cash deficit in one month was running $A8.5 billion lower than forecast.

In addition, iron ore prices have been averaging well above the MYEFO assumption. Swings in commodity prices can significantly impact company tax collections. Treasury is likely to maintain its assumption that iron ore prices fall to $US55 a tonne and stay there over the forecast period. But ANZ Research expects it to push out, from June 2022, the timing of when prices are likely to reach this level. This change combined with the higher prices observed should see the forecast of company tax collections lift meaningfully.

The labour market outlook is likely to see solid improvements. The Reserve Bank of Australia recently cut its unemployment rate forecasts by 0.5 percentage points in 2022 and 0.25 percentage points in in 2023. Given the surprising jobs strength in December and resilience in January, it seems likely Treasury will further revise those numbers.

Working it

An improvement to the labour market alone will materially lift the forecasts in the federal budget, as labour affects both unemployment benefits and individual tax receipts (the largest revenue source).

Altogether, the improvement to the economic parameters should see the deficit improved by around $A90 billion to $A110 billion across the forward estimates.

The forecast $A15 billion to $A20 billion new policy spending is in addition to the $A8 billion worth of non-COVID related spending that was taken at MYEFO but not announced.

A large chunk of the additional spending to be announced is expected to come from an extension of the low-and middle-income tax offset, currently set to expire in 2021-22. The offset was introduced in the 2019-20 budget and has since been extended twice.

Treasury has previously estimated the policy to cost almost $A8 billion per year. Given the timing of the tax refund, an extension of the policy to 2022-23 will hit the budget bottom line in 2023-24.

In terms of policy announcements that we know of since MYEFO, there has been around $A2.3 billion worth of spending, including policies for payments to aged-care workers. ANZ Research expects more announcements over the coming weeks as the budget draws closer.

Hayden Dimes is a Market Economist & David Plank is Head of Australian Economics at ANZ

This story is an edited excerpt from the ANZ Research Report “Australian Economic Insight: Better Economy, Smaller Deficits” published February 24, 2022

BUDGET 2022: onwards & upwards
Hayden Dimes & David Plank
Market Economist & Head of Australian Economics, ANZ

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