The Treasurer said that the $6 billion better-than-expected budget outcome for 2023–24 was due to reduced spending rather than increased taxes.
On Monday morning, Treasurer Jim Chalmers revealed the underlying cash surplus was $15.8 billion in the 12 months through 30 June this year, or 0.6 per cent of the gross domestic product.
This follows a surplus of $22.1 billion (0.9 percent of GDP) delivered in 2022–23.
“These are the biggest back‑to‑back surpluses on record,” the Treasurer said in a statement.
Reinforcing the government’s commitment to “responsible economic management”, which has recently come under significant scrutiny from economists, he stated: “The government’s budget strategy strikes the right balance between fighting inflation, rolling out responsible cost‑of‑living relief, supporting growth in our economy and strengthening public finances.”
“The budget position has improved by $172.3 billion across the past two years compared to what we inherited from our predecessors,” Chalmers said.
“The stronger budget position means gross debt is $149.1 billion lower in 2023–24 than what was forecast at the election, which means we avoid around $80 billion in interest costs over the decade.”
According to the Treasurer, the surplus is larger than forecast in the 2024–25 budget, “entirely due to lower payments, not higher taxes”.
Namely, according to the government, payments as a share of GDP were 25.2 per cent of GDP in 2023–24, lower than the 27.1 per cent of GDP forecast at the time of the election.
However, an economist pointed out that the budget outcome largely reflects “good luck” rather than “smart decision making”, attributing it to a stronger economy and rising commodity prices.
While it should be regarded as “good news”, AMP’s Shane Oliver cautioned that the looming deficits cast a shadow over Monday’s surplus announcement.
He emphasised that the outcome was “largely anticipated”, making it unlikely to sway the Reserve Bank (RBA) or investors significantly.
“There’s also this issue that the likelihood is that we will probably go back into deficits this financial year and beyond, as the structural spending pressures start to ramp up … To turn around from that will be a much bigger ask,” Oliver said.
In fact, according to projections, Australia faces a likely deficit of $28 billion this financial year and a $43 billion deficit the year after.
The government has ’shot itself in the foot’
Breaking down the budget surplus, Oliver explained that revenue flows to Canberra, boosted by higher-than-anticipated commodity prices, have helped safeguard the budget bottom line.
“The government had been assuming that the iron ore price, for example, was originally $55 and $65, and for much of the last two years we’ve been well above that, well above their assumption,” Oliver said. “At the same time, the strength in energy prices that came about on the back of the Ukraine war, that started to participate.”
He said the structural spending pressures in areas like the NDIS, defence, and aged care will be exposed once the upside surprise in commodity prices starts to fade.
In fact, projections show a decrease in tax revenue to 23.3 per cent of GDP in 2024–25 from 23.8 per cent of GDP in 2023–24, and an increase in payments to 26.4 per cent of GDP in 2024–25 from 25.4 per cent of GDP in 2023–24.
“The government is doing things to try and slow them [spending pressures] down, particularly NDIS and aged care, but you’re still going to see very strong growth in the years ahead, and that’ll show up as a return to deficit,” Oliver said.
He assessed that the government’s assertions of cutting spending don’t reflect active decisions but are rather a result of reduced demand for welfare and unemployment benefits.
Oliver argued that, instead, stronger-than-expected government spending over the past two years has exacted a price, dampening consumer demand as rising interest rates take their toll.
“You can make an argument that the price we paid for stronger public spending than was expected a couple of years ago, has been weaker consumer spending, and that’s been driven by higher interest rates. So the RBA has had to keep interest rates higher for longer than it would have been the case if we hadn’t seen this boom in public spending,” the chief economist said.
“So the government has a point, yes they are running a budget surplus, that gets money out of the economy that otherwise could have been spent. But by the same token, the strength in government spending over the last couple of years has made the Reserve Bank’s job harder.”
Noting that while “it’s a confusing and messy picture”, Oliver believes the government should have exercised spending restrains in their first budget back in October 2022.
“The brakes should have been put on back then, and that would have made the Reserve Bank’s job a little bit easier,” he said, which could have resulted in an even higher surplus.
According to Oliver, the government has essentially “shot itself in the foot”.
Regarding his expectations for rates, Oliver maintained that a cut is most likely in February next year.
“Base case is February. The reason it could come earlier is that the underlying inflation numbers seem to be falling reasonably rapidly … So it is conceivable we could get a cut by year end, but I’m not quite there yet. The forecast base case is still appropriate,” he said.
The Commonwealth Bank, however, expects fiscal policy easing to prompt the RBA to cut rates this year.
With fiscal easing, slowing inflation, a weak consumer outlook, and a gradually loosening labour market, CBA is confident the RBA will follow the global trend and lower interest rates by the end of 2024.
In its commentary on the budget surplus on Monday, the CBA said: “To assist the RBA in returning inflation to the 2–3 per cent target range and beginning the process of returning monetary policy to a more neutral setting, the Commonwealth government will need to ensure that fiscal policy does not provide unnecessary stimulus to the economy.”
The CBA stands alone in predicting a definite rate cut will occur this year.
