Next month’s budget is not expected to forecast a surplus for at least the next three financial years, Treasurer Jim Chalmers has warned.
As previously hinted at by the Treasurer, the final budget outcome for 2021-22 showed an underlying cash deficit of $32 billion, an improvement of nearly $48 billion on the $79.8 billion deficit forecast in the previous government’s budget in March this year.
However, Dr Chalmers and Minister for Finance Katy Gallagher said that it was not guaranteed that all of the factors driving this improved outcome would be sustained over the longer term.
Subsequently, the Treasurer has indicated that it is unlikely that Labor’s first budget, to be handed down on 25 October, will have a surplus in any of the forward years.
“One of the reasons why we’ve tried to be as upfront and honest and level with people about the fiscal situation is we want people to understand these pressures that are on the budget,” Dr Chalmers said.
“So in October, I would encourage people not to anticipate a surplus budget even in the out years. The situation is more difficult than that.”
The improvement to the budget deficit, the government said, was the result of a $27.7 billion lift in tax receipts and a $20.1 billion fall in payments compared to the March forecasts.
Higher than expected company taxes accounted for over half of the increase to receipts, driven by high commodity prices and less uptake of COVID-19 business support than anticipated.
Delays in contracting COVID-19 spending, supply chain disruptions and capacity constraints delaying infrastructure projects were said to be the main factors in the reduction in payments, along with lower-than-expected demand for health, National Disability Insurance Scheme (NDIS) and aged care services.
AMP chief economist Shane Oliver said that while these improvements would typically flow through to lower deficit projections in later years, the flow through this time will likely be limited.
“The government will continue to assume that commodity prices will fall back at some point; unemployment will rise as the economy slows; some of the delayed 2021-22 spending will be pushed into this year; structural pressures from health, aged care, the NDIS, defence and debt interest costs will boost spending in future years; and a likely lower long-term productivity growth assumption will lead to lower long-term revenue assumptions,” he stated.
“The October budget is likely to project ongoing deficits in the years ahead, albeit they may be a bit lower than projected in March.”
Looking ahead, Dr Chalmers and Ms Gallagher said that Australians were under no illusions about the enormity of the looming economic challenges.
“Australia faces more substantial pressures that will have an ongoing impact on our fiscal position including higher costs of servicing government debt, increased spending on government payments from higher indexation, and underlying spending growth in areas such as NDIS, health, aged care and defence,” they said.
Despite this, the Treasurer and Minister for Finance have suggested that there is every reason to be optimistic about the future.
“The 2022-23 October budget will lay the foundations for the better future that Australians deserve — providing responsible cost-of-living relief, investing in the potential of our people and capacity of our economy, and beginning the hard task of longer-term budget repair,” they said.
Commenting on the final budget outcome, economists at the Commonwealth Bank said that the latest improvement to the bottom line represented a substantial tightening of fiscal policy compared to the $134 billion deficit seen in 2020-21.
“With the RBA now tightening monetary policy, it will be important for the updated 2022-23 budget released on 25 October to continue to tighten fiscal policy — working hand-in-hand with tightening monetary policy to help contain the current inflation surge in Australia,” said CBA chief economist Stephen Halmarick and associate economist Harry Ottley.
