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It’s been clear for some time that if our economy improves, our budget will too. So it’s no surprise that the recovery is helping Australia’s budget position.
Global growth is recovering fast and Australia’s world-class defence against COVID-19 has us near the front of the pack. Australia has more jobs now than before the pandemic, and the momentum in the labour market is set to be only temporarily disrupted by the end to JobKeeper. In addition, continued strength in the iron ore price is boosting national income.
Deloitte Access Economics latest Budget Monitor predicts that on budget night next week, the Treasurer will announce substantial upward revisions to the economic outlook. To be clear, the recovery has been stronger than the last official forecasts predicted in December 2020, but the economy still remains under pressure.
Last week, in the Pre-Budget Economic and Fiscal Strategy Speech, the Treasurer outlined that the government aims to “drive the unemployment rate down to where it was prior to the pandemic and then even lower”. At the same time, Treasury has lowered its estimate of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) from 5% to between 4.5-5% – to be more in line with the consensus view of the ‘natural’ rate of unemployment. That means the economy needs to recover further before shifting the focus to budget repair.
Personal tax collections are benefitting from the stronger than expected recovery in jobs, despite continued slow growth in wages. Better than expected small business profits, dividends and farm incomes are also contributing to an uplift in personal taxes.
Profit taxes are similarly expected to outperform. The initial damage to profits from COVID-19 was smaller than expected and prices for key exports – most notably near record iron ore prices – are bolstering company tax collections. Healthy share markets are supporting superannuation tax, while recovering gas prices are adding to resource rent taxes.
On the spending side, the Australian Government provided timely and necessary emergency support in response to the economic effects of COVID-19. The response led to massive increases in government spending and the centrepiece of additional spending was in government transfer payments. However, the bulk of the additional spending is behind us, with policy support to the economy peaking in mid-2020.
That said, some additional policy support will continue to add to spending, including for vaccines, tourism, housing and aged care.
The bottom line
Overall, Deloitte Access Economics estimates that deficits will be almost $100 billion smaller over the four years to 2023-24 compared with the latest official estimates. However, the size of the deficits are substantial – with the underlying cash deficit estimated at $167 billion this financial year and $87 billion next financial year. Government debt has also surged, which is of less concern in a low interest rate environment.
The stronger than expected economic recovery is currently helping to improve the budget position. Some years down the track, and even with sustained economic growth, fiscal strategy will need to look beyond the economic recovery to achieve meaningful budget repair.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Cathryn joined Deloitte Access Economics in 2016 from the Commonwealth Treasury. Cathryn has a detailed understanding of the Australian economy and strong expertise in economic forecasting and analysis. Cathryn has provided advice to government and private sector clients on a range of macroeconomic issues covering the Australian and global economies. Cathryn specialises in providing economic forecasts and advice for mergers and acquisitions, as well as government budget policy analysis. At Treasury, Cathryn was responsible for economic and tax revenue forecasting as well as providing policy advice to government.