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BUDGET 2022: spending beats expectations

Rates Strategist & Economist, ANZ

2022-03-30 00:00

The Australian Government announced almost $A40 billion in new spending as part of the Federal Budget, across five years from 2021-22.

This is quite a bit more than ANZ Research had forecast.

Importantly, more than half of that spending is expected set to occur in the 2021-22 and 2022-23, adding to demand at a time when the economy is already strong.

When the Reserve Bank of Australia begins to raise interest rates, ANZ Research expects it to move with some vigour, and the cash rate to reach 2 per cent by the end of 2023.

Despite the spending, the Budget still shows a material reduction in the deficit, down $A103.4 billion over the five years from 2021-22, compared to the recent mid-year economic and fiscal outlook. This is due to an improved economic outlook, which lifts the fiscal position by $A142.9 billion before the additional spending.

Though the narrowing of the deficit can be interpreted as a tightening of policy, it is hard to argue fiscal policy is especially tight, with a deficit of 3.5 per cent of GDP and an unemployment rate of 4 per cent (and falling).

Rebuilding the fiscal buffers, as this Budget has begun to do, is an important task. This was critical for Australia to have the fiscal capacity to spend aggressively during the pandemic. More may need to be done sooner rather than later.


The underlying cash balance for 2022-23 is expected to be a deficit of $A78 billion. From there, it is forecast to improve further with the deficit narrowing to $A43.1 billion (1.6 per cent of GDP) by 2025-26. This is better than ANZ Research had expected – and it all comes from a stronger economic outlook.

Offsetting this partially is the new spending. The primary focus of this is around infrastructure and policies to ease cost-of-living pressures. The fuel excise rate will be halved for six months, while the Government announced a $A420 cost-of-living tax offset, and a $A250 payment for those on income support.

This is the first fiscal update over the last couple of years to not ‘spend’ all the gains from a stronger economic outlook. But the level of spending means fiscal policy is still providing plenty of stimulus for the economy.


The economic forecasts underpinning the Budget appear reasonable, though perhaps still a little conservative. For nominal GDP - the key parameter for the deficit - the Government’s numbers are quite a bit lower than ANZ Research’s for 2022-23.

Like ANZ and the RBA, Treasury is also forecasting a decline in the unemployment rate to historic lows. However, ANZ Research thinks unemployment will fall even more than it expects, and wages will rise faster and higher.

With the material reduction in the deficit, net debt is forecast to rise slower and peak lower than expected at MYEFO. As a share of GDP, this reduction is even larger given the improved economic outlook.

These reductions have helped to largely offset an assumed rise in borrowing costs in the Budget, given the significant move higher in bond yields since MYEFO.

 The interest rate assumptions seem low, in ANZ Research’s view, and there is a risk interest costs come in higher than Budget forecasts. Nevertheless, the burden of the interest payments as a share of GDP will remain very manageable.

Hayden Dimes is a Rates Strategist & Economist, David Plank is Head of Australian Economics, and Felicity Emmett, Catherine Birch & Adelaide Timbrell are all Senior Economists

This story is an edited version of the ANZ Research report, “Budget 2022-23: plenty of new spending”, released March 29, 2022

BUDGET 2022: spending beats expectations
Hayden Dimes et al
Rates Strategist & Economist, ANZ

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