Budget 2023: A return to surplus but structural deficits remain

Key budget measures

• $14.6 billion over four years in cost-of-living support for mostly low to middle income households, including $3 billion (shared with states) in one off energy bill relief for 5 million low-middle income households and 1 million small businesses
• An additional $3.5 billion to Medicare over 5 years to allow better access to GP’s through a lift in the bulk billing incentive, cheaper medicines
• A boost to rent assistance, subsidies to move from gas to electric appliances, and increased support for single parents costing
• $1.9 billion over 5 years and a modest increase in Jobseeker with more for over 55s
• Increased spending on aged care partly flowing from a 15% pay rise for aged care workers which will cost $14.1 billion over four years

• A $20,000 instant asset write-off for small businesses;
• A ramp up in defence spending on missiles and submarines, offset by a reallocation of defence spending;
• Some measures to help boost housing affordability – with tax changes to boost build-to-rent housing and wider access to the Home Guarantee Schemes;
• A lift in renewables investment through $2 billion for the Hydrogen industry and incentives for developers to build “greener” houses;
• Measures to support impact investing to tackle social problems;
• $498 million to crack down on vaping and reduce smoking.

Economic assumptions

We are a bit less optimistic on growth in the year ahead and hence see higher unemployment earlier. Either way Australia is set to enter a per capita recession. The Government now sees net immigration of 400,000 this year up from a forecast of 235,000 in October, taking population growth to 2% for the first time in 14 years, slowing to 315,000 in 2023-24. 

The Government revised up its medium-term iron ore price assumption but only to $US60/tonne. With the iron ore price now about $US105/tonne, it’s still a potential source of revenue upside.

Budget projections – fastest improvement since WW2

Some of the windfall has been spent (see the line called “new stimulus”) but 86% of it out to 2026-27 has been saved. As a result, the budget is now projected to be in surplus for this year – its first since 2007-08, a massive turnaround from the $99 billion deficit projected less than 18 months ago and the fastest improvement as a share of GDP since the end of WW2 when the deficit went from 10.5% of GDP in 1944-45 to 0.8% in 1946-47. 

While there is net new stimulus going forward (mainly in 2024-25) due to the cost-of-living measures it turns negative by 2026-27 (as Budget savings kick in) and over the next four years is swamped by the revenue windfall resulting in lower budget deficits going forward.

Assessment

The Budget has a lot commend it: the cost-of-living measures will help ease pressure on the most vulnerable and some (energy, medicine and rent relief) will lower measured inflation; the budget is now back in surplus for this financial year; by “saving” the bulk of the revenue upgrade budget deficits are lower and this cuts interest costs; the Government has slowed structural spending growth (eg in the NDIS) and raised extra revenue; and there is still scope for revenue surprise with commodity price assumptions.

• While some of the cost-of-living measures will directly help lower measured inflation (by around 0.4%), the new fiscal stimulus next financial year of $12 billion risks boosting demand and adding to inflation – but it’s hard to be adamant as overall the Budget is taking more out of the economy compared to the projections last October.
• While the medium-term structural budget deficits have been sharply reduced they are still large – despite this being the Budget in the political cycle to address this issue as next year’s budget will be in the run up to the next election. It’s a bit of a lost opportunity and leaves the budget vulnerable should economic conditions prove weaker than expected and doesn’t provide much hope for actually paying down debt to put money aside for a rainy day.
• In particular, after several years of upside surprise to revenue, the risk is that this reverses in the year ahead if the economy slows more.
• While the rise in Government spending as a share of GDP has been capped it’s still projected to settle at a level well above that seen pre-pandemic thereby locking in a bigger government sector which risks further slowing productivity growth over the medium term.

While the housing measures are welcome, they are unlikely to make much of a difference in the next few years to housing affordability with the supply shortfall intensifying with very high immigration levels.

Implications for the RBA

Implications for Australian assets