High commodity prices are supporting Australia's fiscal outlook.
The Australian Treasury will downgrade its growth outlook when its releases its Budget on Oct 25, signalling a much smaller deficit than forecast by the previous government in March thanks to high commodity prices and the strong jobs market.
Growth will be trimmed to 3.25% from 3.5% for the 2022-23 fiscal year, while the growth forecast for 2023-24 will be cut to 1.5% from 2.5% as higher interest rates and inflation sap household spending, according to draft figures from the Treasury. (See MNI INSIGHT: RBA Watches Calmly As Red-Hot Housing Cools)
The Budget will forecast inflation to peak at 7.75% in the December quarter, similarly to the Reserve Bank of Australia. The forecast for inflation in 2022-23 will be raised to 5.75% from 5.5% in July when the Treasurer delivered an update, while next fiscal year's forecast will lifted to 3.5% from 2.75% - above the RBA 2-3% inflation target. The RBA is expected to lift rates by 25bps when it meets on Nov 1.
The deficit for 2022-23 is estimated by economists to be around AUD30 billion lower than the Pre-election Fiscal and Economic Outlook in March that forecast a shortfall of AUD79.8 billion. An additional AUD100 billion of revenue over the forecast period thanks to high commodity prices is expected to deliver lower-than-expected deficits over the next two years. However, deficits are then set to rise due to the rising cost of the National Disability Insurance Scheme.