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The economics of the October 2022-23 federal Budget

By Brian Parker, Australian Retirement Trust Chief Economist

26 October 2022

The Chalmers Budget

The macroeconomic backdrop for the Albanese Government's first Budget is an incredibly challenging one. There is little to no scope for any meaningful easing in fiscal policy. Inflationary pressures - both here in Australia and globally - have proven far more persistent than hoped. Central banks across much of the globe - including the Reserve Bank of Australia - have raised official interest rates aggressively. And the budget remains in structural deficit, with little to no effort having been made to address it.

The economic forecasts

The economy is expected to slow significantly over the next two years from growth of 3.25 per cent in the current fiscal year to just 1.5 per cent in 2023-24. The forecast is broadly credible and unsurprising given the outlook for the global economy, particularly given that the world's major central banks continue to raise interest rates aggressively. This year, Australia's nominal GDP growth has benefitted from the sharp rise in commodity prices, a windfall that has clearly boosted revenue, but also one that is expected to unwind in 2023-24 and produce a small decline in nominal GDP. The profiles for wage and price inflation are also reasonable.

The numbers

For the four years of forward estimates to 2025-26, the cumulative underlying budget deficit is now expected to be $182 billion, an improvement on $42.7 billion from the $224.7 billion cumulative deficit projected in the Morrison government's final budget delivered in March. However, that improvement is heavily front-loaded - deficits for the final two years of the estimates are larger than forecast in March.

Over the forward estimates, the impact of policy decisions taken by the new government since the Pre-Election Economic and Fiscal Outlook (PEFO) increases the cumulative budget deficit by $9.8 billion. Thankfully, the impact of changes to “parameters” such as an economy and hence a revenue base that is larger than earlier projected, adds $52.5 billion to the bottom line, a combination of figures that allows the Treasurer to state that the government is “banking” the lion's share of the additional revenue projected to fall into its lap over the next four years.

The economics of it all?

The Budget on the face of it is mildly expansionary, giving back marginally more than the additional savings it takes in, but only very mildly, and certainly no-where near large enough in its macroeconomic impacts to change either market or central bank forecasts for how the economy is likely to perform over the coming years and nor should it change the Reserve Bank's calibrations of just how much further interest rates will likely need to rise. As with the final Morrison government budget, there isn't a forecast in sight. Addressing the structural budget deficit is likely to require serious efforts on both spending restraint and raising revenue. Pleasingly, the government has tonight removed the arbitrary tax revenue cap imposed by the previous government of no more than 23.9 per cent of GDP. The budget's fiscal strategy is now to allow “tax receipts and income support to respond in line with changes in the economy and directing the majority of improvements in tax receipts to budget repair”.

What does it mean for how we invest your money?

The government's announced Housing Accord provides Australian Retirement Trust the opportunity to carefully examine where there are opportunities for investment that are also in our members' best financial interests. Outside of these potential opportunities, for the most part, it's the medium to long term outlook for the Australian and world economies, inflation, interest rates, corporate earnings that are critical in determining what kind of investment returns our members will achieve, not what happens on budget night. And on that score, this Budget is largely no different.

This document has been prepared and issued by Australian Retirement Trust Pty Ltd ABN 88 010 720 840, AFSL No. 228975, the Trustee and issuer of the Australian Retirement Trust ABN 60 905 115 063. It contains general information only. Any advice does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of any advice having regard to your personal objectives, financial situation and needs before acting on that advice.Consider the Super Savings PDS before deciding and the TMD at or call 13 11 84