The Labor government will hand down its first budget at 7.30pm Tuesday, 25 October, in what will be the second federal budget to be delivered in 2022.
Ahead of budget night, economists at the Commonwealth Bank, NAB, Westpac and ANZ have all released previews on what the 2022–23 budget will likely contain.
The big four expect that the government will forecast a deficit of somewhere between $25 billion and $45 billion over 2022–23, compared to the March budget’s forecast of a $78 billion deficit.
Westpac is at the higher end of the scale and expects the budget to forecast increasing deficits over the forward estimate including a shortfall of around $45 billion in 2022–23, up from the lower than expected deficit of $32 billion in 2021–22.
According to the bank, the improved starting point for the deficit, slower growth and higher inflation than outlined in April’s Pre-Election Economic and Fiscal Outlook (PEFO) and a potentially significant increase in the costing of major existing programs like the NDIS, aged care, health care and defence, will be among the key themes of the upcoming budget.
“New policy initiatives centre on the government delivering its promises from the election campaign, including proposed savings. We do not expect the government to extend any of the business tax incentives that are due to expire in 2022–23,” Westpac’s economists noted.
Meanwhile, ANZ expects the budget to estimate a deficit of between $35 billion and $40 billion in 2022–23, with structural expense pressures and a slowdown in growth pushing the deficit higher in later years.
“While new spending policies for 2022–23 are expected to be limited, we know the budget will include the government’s pre-election commitments, some modest cost-of-living support and additional COVID relief,” economists at ANZ said.
“Some of these initiatives are likely to be funded by reallocation from existing programs. The deterioration in the underlying balance in 2022–23 reflects the spillover of 2021–22 expenditure and higher inflation, rather than new policy measures.”
CBA has the 2022–23 budget deficit at $30 billion to $40 billion, or 1.2 to 1.5 per cent of GDP. This, if realised, would signal little changed from the 2021–22 deficit which sat at 1.4 per cent of GDP.
“Both the Prime Minister and Treasurer have been at pains to support the view that fiscal policy needs to work hand-in-hand with monetary policy at this time, to assist the Reserve Bank (RBA) get on top of the surge in inflation flowing through the Australian economy,” said CBA chief economist and head of global economic & markets research, Stephen Halmarick.
“It will be important for the government to maintain budget deficits of approximately 1 to 1.5 per cent of GDP not only in 2022–23, but also over the next few years to assist the RBA in managing the economic cycle and the surge in inflation.”
Finally, NAB believes the budget will forecast a deficit of $25 billion to $30 billion on the back of a surge in budget revenues, which the bank noted sat almost 40 per cent above pre-pandemic levels in June this year.
“Still conservative assumptions for iron ore and coal prices will likely mean the actual 2022–23 deficit will likely be better than what will be published on Tuesday,” predicted NAB head of market economics, Tapas Strickland.
“The PBO notes the net impact of election promises amounts to $1 billion in 2022–23 and $2 billion in 2023–24 which is around 0.1 per cent of GDP. Higher yields also mean rising public debt interest costs of up to 0.6 per cent of GDP by 2032 – and the Treasurer includes these pressures, along with pressures from defence spending, ageing, health and the NDIS as longer-term budget challenges that need to be addressed.”
As for the budget’s other economic forecasts, Westpac anticipates a 0.5 percentage point downgrade in GDP growth to 1.5 per cent in 2023–24, and a 0.75 point lift in inflation to 3.5 per cent.
Summing up its outlook for the budget, NAB said that Australia is still in a favourable fiscal position with significant differences to what is currently occurring in Europe.
“The key to this difference is Australia — as a major energy and food exporter — has seen its terms of trade rise during the pandemic and Russian invasion of Ukraine, helping boost company profits, and in turn, tax revenues,” the bank said.
“Gross and net debt profile also remain relatively favourable — because of prior fiscal discipline by both sides of politics 0 and a lot lower than in other advanced economies. Using the IMF WEO, Australia’s gross debt at 56.7 per cent of GDP remains well below Germany (71.1 per cent), the UK (87 per cent) or the US (122 per cent).”
All four of the banks agree that spending in the upcoming budget will primarily be focused on health, the NDIS, aged care and defence.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.