Budget Forecasts: Policy Measures Have Net Positive Economic Effect

Treasury’s updated economic forecasts were published with the fiscal outlook yesterday. They show the first budget surplus in 15 years but with both growth and the fiscal position deteriorating while inflation returns to target in 2024-25. There is the risk that the measures announced will add to inflation and the pressure for the RBA to hike.

• The budget is projected to be in surplus by $4.2bn in the current financial year worth 0.2% of GDP. It will return to a deficit in 2023-24 of $13.9bn or 0.5% of GDP and then reach 1.3% the following year. In October, the deficit was forecast to peak at 2%. Spending as a share of the economy is to rise to a peak of 26.8% of GDP in 2024-25 up from 24.8% this FY while receipts peak at 25.9% in 2023-24.
• The risk to the budget’s bottom line is from the stage 3 tax cuts which are worth $69bn over 5 years and haven’t been included in the budget estimates as won’t be implemented until the 2024-25 FY.
• The impact on the underlying cash balance from policy decisions in this budget is projected to be 0.5% of GDP in 2023-24 and 0.2% in 2024-25. Thus it is not surprising that economists have been sceptical that the budget’s measures wouldn’t be inflationary, as the government is claiming.
• Treasury expects inflation to ease over the forecast horizon. It should be 3.25% in 2023-24 and then in the RBA’s target band at 2.75% in 2024-25 and falling further to 2.5% in 2025-26. The 2024-25 forecast is more optimistic than the RBA’s, which has an average 3.1% with 3% in June 2025.
• Growth forecasts are little changed with growth troughing in 2023-24 at 1.5%, which is more optimistic than the RBA’s 1.3%, and then recovering to 2.75% by 2025-26.
• The gross debt ratio is expected to remain low compared to other OECD countries but still trending gradually higher over the forecast horizon reaching 36.5% in 2025-26 from 34.9% this FY, lower than expected in October.