Iceni’s breakdown of the 2022-23 Federal budget
With the 2022 federal election looming, and polling indicating that the ALP maintains a strong two-party preferred lead over the LNP, many commentators were predicting a classic pre-election budget with lots of spending and cash handouts. And with the release of the budget by the Treasurer on Tuesday evening, their predictions came to fruition.
The budget presented a mixed bag of spending initiatives, both short-term to address cost of living pressures (and win votes!), and longer term, to improve the productive capacity of the economy through infrastructure spending and skills development.
Gone is any notion of a budget emergency associated with rising Government debt levels (admittedly proffered by the Abbott government some years ago) and in its place is a level of forecast government spending (relative to GDP) that is at record levels for this century, and which will continue to push government debt higher over the coming years.
While this might sound a bit doom and gloom, it isn’t.
The Australian economy is actually booming, albeit supported by strong government spending, but also high commodity prices (with our terms of trade – the cost we pay for our imports relative to the prices we get for our exports – expected to reach record levels this year).
What are the projected impacts?
Unemployment is forecast to fall to below 4 per cent and the forecast budget position over the forward estimates has improved significantly since MYEFO, with a $103.6 billion improvement in the budget bottom line, a budget deficit halving to 1.6 per cent of GDP, and government debt levels 5.4 per cent and 3.9 per cent from a gross debt and net debt perspective, respectively, lower than the MYEFO forecast.
Also underpinning the rosier outlook for the Australian economy is forecast wages growth, which in turn pumps up the government’s forecast tax revenue, although the budget papers note the uncertainty about the pace of wages growth. The Wage Price Index (the key measure of wages growth) is forecast to increase from 2.75 per cent through the year to the end of June 2022, rising to 3.25 per cent through the following year. This would be a welcome outcome for many workers which have seen their pay packets stagnate over recent years at the same time as the cost of goods and services have increased, notably housing, petrol and groceries.
Despite the tight labour market and growing inflationary pressures, this has not had the anticipated effect (according to economic orthodoxy) of driving wages growth higher, although there can be a lag between the two. This disconnect has driven some economists to re-calibrate downwards Australia’s NAURI (non-accelerating unemployment rate of inflation), which is essentially the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise. For many years Australia’s NAURI was widely considered (including by the RBA) to be around the 5 per cent mark, although recent experience would indicate this level is currently closer to 4 per cent.
This improvement in the budget bottom line has given the Government the ammunition to loosen the purse strings, some of it much needed to address infrastructure needs, environmental protections, cost of living pressures and the list goes on.
What are the wins?
There are a number of one-off payments which were announced as short-term measures to address cost of living pressures but also appear well calibrated to coincide with the election.
Nevertheless, the Government should be applauded for its continued emphasis on infrastructure spending, which increases the ability of the economy to produce goods and services and transport those services to markets, both domestic and international, more smoothly.
More money for mental health and suicide prevention is also welcome, as is additional funding for recycling soft plastics, protecting the great barrier reef, supporting training for Australia’s workforce, and improving women’s safety. Expanding the paid parental leave scheme will also mean more parents will be able to access the scheme with a change in income test, although this may rankle some as the household income threshold of $350,000 is very generous.
The significant increase in national intelligence spending is in keeping with the government’s strong focus on national security, an area it will be seeking to strongly differentiate itself from the Labour party during the election campaign.
Lost opportunities
While there has been substantial funds spent across a range of sectors, the lack of spending on climate change is notable and disappointing. There are very few climate change initiatives and virtually no new spending on climate initiatives. Similarly disappointing is the lack of significant tax reforms in areas perhaps too politically sensitive to tackle at this point in time. Economists for year after year, budget after budget, have sounded alarm bells on the lack of meaningful tax reform around housing. At some point, this issue will need to be tackled, just not this year.
What is the flip side?
Notwithstanding the benefits to the economy and to communities and individuals from some of the spending initiatives in the budget, increasing government spending during this time brings with it some real risks.
It risks further stoking inflation in the short to medium term, wiping away gains from any wage price increase (with inflation continuing to outstrip wages growth, meaning many people will continue to be worse off from a cost of living perspective). This increase in inflation, along with international factors like rising global interest rates and the costs of raising money in international money markets by Australia’s banks – remember, we don’t save enough and so our banks need to borrow internationally to lend out for predominantly housing – will also see upside risks to interest rates, creating real headaches for policymakers given Australia’s heavily leveraged mortgage holders.
Time will tell…
Overall, the budget paints a positive picture of Australia’s economic future, at least in the short to medium term. However, the lessons from history show that events outside of the Government’s control – wars, pandemics for example – could impact that very quickly.
Only time can tell whether the economic forecasts predicted in this budget will come to fruition.
