The strong jobs market and high corporate earnings, especially in resources and energy have driven a significant improvement in the federal budget for the 2021-22 financial year.
As expected the final 2021-22 budget deficit was $32 billion (1.4% of GDP), down from $80 billion projected in the final Morrison government budget in March and the massively over-pessimistic $99 billion in the December 2021 midyear update.
Unlike countries in Europe, Japan, Canada and even China, Australia has been a big beneficiary of the inflation driven by Putin’s invasion of Ukraine in late February, which came as energy prices in particular were still rising after 2021’s energy crisis in Europe, the UK and China (which saw power rationing).
Today sees the end of the temporary six-month cut to the fuel excise that cost the budget $3 billion and may have helped put a lid on the size of inflationary rises in the March and September quarters but will boost inflation through the December quarter of this year and three months to March, 2023.
The cut was really an election policy move by the former Morrison government and not really an attempt to provide any sustained cost of living relief.
Because the jobs market is so strong with unemployment falling and plenty of job vacancies, welfare transfers fell, especially the various payments to people out of work.
While the improved budget position has been evident for most of this calendar year as higher tax receipts flowed into commonwealth coffers, it is always a comfort to know that the budget levers are working as expected – that’s tax revenues rise when things are doing well and welfare payments fall as the labour market improves.
But 2021-22 will be a one-off with coming financial years to see higher welfare spending on items such as the aged care, NDIS, Medicare and bulk billing payments and defence.
The AMP’s Shane Oliver says that while normally this would flow through to sharply lower deficit projections for subsequent years, “the flow through this time will likely be limited as the Government will continue to assume that commodity prices will fall back at some point; unemployment will rise as the economy slows (and) some of the delayed 2021-22 spending will be pushed into this year.”
Dr Oliver says there’s structural pressures from health, aged care, the NDIS, defence and debt interest costs which will boost spending in future years; “and a likely lower long term productivity growth assumption will lead to lower long term revenue assumptions.”
So the October Budget is likely to project ongoing deficits in the years ahead, albeit they may be a bit lower than projected in March. The lower deficit in 2021-22 “will likely delay the time when Federal public debt rises above $1trn from 2023-24 into 2024-25.”
One early leak from thew government is that the October budget will contain that old standby – more tax from multinationals and major corporates with $1.9 billion extra targeted.
In the context of the size of the Australian economy and the extra $50 billion or so of revenue in 2022 just from the normal budget levers, that’s not much at all.