In the lead up to the federal budget next Tuesday, the Commonwealth Bank has predicted a $40 billion improvement to the budget balance versus MYEFO forecasts from December.
The bank’s head of Australian economics, Gareth Aird, said that tax receipts during the 2021-22 financial year were expected to be $30 billion higher than previously forecast on the back of strong employment growth and higher commodity prices.
“The backdrop for the March 2022 budget comprises a pandemic that is largely behind us, a domestic economy that is firing on all cylinders, a 4.0 per cent unemployment rate that is trending lower, rising inflation, surging commodity prices and a war in Ukraine,” he said.
“An election is also just around the corner, which makes the upcoming budget a ‘pre‑election budget’.”
CBA said that low unemployment, which has moved below the 4.5 per cent rate predicted in the MYEFO for mid-2022, would result in a significant reduction in welfare payments and contribute to a $10 billion reduction in total expenditure.
In this year’s budget, CBA said that the government would unveil $10 billion in additional spending on infrastructure, education, digital transformation and energy along with policies that aim to combat cost-of-living pressures.
“Overall, we expect the March 2022 budget to be supportive of demand in the economy,” said Mr Aird.
“The improvement in the fiscal position will not be a result of policy changes, but rather it will be the result of an economy that is in much better shape than the government forecast in the MYEFO.”
Net debt as a share of GDP will reach 31.4 per cent in 2022-23 according to the bank, against the MYEFO forecast of 34.7 per cent.
CBA does not expect any budget announcements will lead to a change in its outlook for interest rates, which are forecast to begin rising from June this year.
However, the bank said that it may need to increase its forecasts for next year, when interest rates are predicted to peak at 1.25 per cent, if fiscal policy is more stimulatory than expected.
“Policies that seek to help households deal with higher consumer prices by adding to demand in the economy will put further upward pressure on prices, which in turn increases the probability that the RBA takes monetary policy into contractionary territory,” Mr Aird said.
“We estimate the neutral cash rate to be 1.25 per cent which means we believe contractionary monetary policy is a cash rate above that level.”
