BUDGET 23: strength to cut deficit

An increase in expected revenue off the back of stronger nominal gross domestic product (GDP) growth will likely reduce previously estimated deficits in the upcoming Australian federal budget.

The budget deficit for 2022-23 is expected to run around $A8 billion, much smaller than the October 2022 estimate of a $A36.9 billion. There is a chance of a small, and likely temporary, surplus for 2022-23, although ANZ Research expects Treasury will adopt a degree of conservatism in the estimates.

The government’s Monthly Financial Statements for March reported total receipts from July 2022 to March 2023 were $A14.9 billion higher than estimated, while expenses were $A8.4 billion lower. On an annualised basis, this would reduce the deficit estimated in October by around $A31 billion.

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ANZ Research expects an upgrade in revenue estimates throughout the forward estimates in the upcoming budget, off the back of the stronger starting point and likely upgrades to nominal GDP forecasts.

Near-term payments are likely to be smaller than expected in the previous budget, before pressures intensify over the medium term.

There are a few forces at play here. On one hand the economy is strong, unemployment is low and the government has spent the last year looking for savings.

On the other hand structural pressure - such as debt servicing costs, aged care, health care, the NDIS and national security - are expected to intensify over the medium term.

ANZ Research sees spending moderating by $A10 billion to $A15 billion in 2022-23, relative to the October budget. In 2023-24, expenses are likely to be similar to previous estimates, but thereafter higher than previously estimated.

Drivers

The tight labour market and strong employment growth have been important drivers of the smaller deficit, with gross income tax withholdings from individuals up $A8.9 billion compared with October’s estimates of the financial year to March.

Employment growth from June 2022 to March 2023 was 1.8 per cent, more than the October budget estimate of employment growth for the year to June 2023, which was 1.75 per cent. Stronger company tax revenue also helped.

ANZ Research expects Treasury to upgrade its labour-market outlook, compared with its October estimate. The unemployment rate, current ANZ Research forecasts and the latest RBA forecasts from February are all lower than Treasury’s October 2022 forecasts.

Elsewhere, press reports suggest the government may look to some revenue policy changes to support the budget bottom line.

ANZ Research expects a larger population and prices higher than previously estimated will drive the nominal GDP and revenue upgrades.

Annual net overseas migration (NOM) into Australia for the year to September 2022 was just shy of 304,000, the first annual result over 300,000 since 2009 and 23 per cent higher than annual NOM in 2019.

Stronger-than-expected employment growth increased individual income tax revenue, which accounted for an average of 47 per cent of the government’s cash receipts in the last five financial years. More people also led to stronger economic and consumption growth.

Inflation expectations for 2022-23 were 5.75 per cent, year on year, which would be exceeded even if quarterly inflation halved between the first and second quarters of 2023. Such a drop is highly unlikely.

Higher prices will feed into revenue in a few ways, including through higher nominal GDP growth and higher GST revenue from higher nominal consumption growth. GST revenue accounted for an average of 19 per cent of government receipts in the last five financial years.

ANZ Research expects Treasury to continue taking a conservative approach to future commodity price estimates.

With the economy in better shape than expected in previous forecasts, the starting point for outlays is lower than estimated in October. And the government has likely reduced spending in some areas to support the budget over the medium term and fund its policy priorities.

Adelaide Timbrell is a Senior Economist and Madeline Dunk is an Economist at ANZ

This story is an edited version of the ANZ Research report “Australia's Budget 2023-24 Preview: stronger economy reduces deficits”, published May 3, 2023.