Forecasting is a notoriously difficult endeavour, especially when it comes to budgets that are subject to changing spending priorities and economic conditions, often outside of government control.
The short interval between last year’s election-delayed budget in October, and the current May budget, should mean the difference between forecasts is closer. On this occasion, the financial books have generally improved, with most of the main metrics showing a better-than-expected outlook.
Small surplus
The Labor government recorded an anticipated small surplus of $4.2bn for 2022-23, which contrasts with the sea of red on the budget books last year.
The underlying cash balance for 2023-24 is now forecast to come in at -$13.9bn, against a projected -$44bn for the same year, according to forecasts in the October budget.
The improved position is partly tied to high commodity prices and a general lift in economic conditions as the early pandemic years, which came with lockdowns and hits to the economy, subside. Labor also credits the improvement to a decision to save the forecast extra revenue, rather than spend it.
Sign up for our free morning newsletter and afternoon email to get your daily news roundup
“By returning the majority of revenue upgrades to the budget, the government is lowering debt and reducing debt interest costs,” the government said.
There are more than a few threats to the forecasts, as noted in the budget’s economic outlook, with elevated global inflation and rising interest rates expected to restrict growth in advanced economies like Australia.
Debt improvements
The level of net debt, when measured against the country’s gross domestic product, is now expected to come in at 22.3% in 2023-24, compared to the prior 25.8% forecast.
The metric is viewed as a way to determine how much debt a country can take on compared to its economic output.
Labor has extrapolated the debt improvements over 12 years, which it says saves the country $83bn in interest costs; although such long-range forecasts can prove elusive.
Net debt is forecast to hit $574.9bn in 2023-24, compared to previous forecasts of $634.1bn.
Inflation expectation
The government now expects the consumer price index to rise 3.25% in 2023-24, which is slightly below the 3.5% previously forecast for that year.
after newsletter promotion
When the October budget was delivered, the Reserve Bank was rapidly raising rates to discourage spending and ease inflation. While rates have continued to rise, the budget notes that inflation has peaked and is now moderating, leading to the lower forecast.
Higher-than-expected tax
The budget is benefitting from higher-than-expected tax receipts, with $616.3bn now forecast to flow into the coffers in 2023-24, compared to $574.3bn previously.
Since October, tax receipts have been revised up by more than $60bn across the two years to 2023-24, which has been attributed to a strong labour market and elevated commodity prices.
The government forecasts anticipate that commodity prices, including key export iron ore, will return to lower levels over the coming years while the tight labour market eases.
‘Carefully calibrated’ spending
Government expenses are forecast to come in at $684.1bn in 2023-24, which is higher than the previous $666.5bn forecast in the October accounts.
The defence, education, health and welfare sectors attract the lion’s share of government expenditure.
Labor has described the construction of its budget as “carefully calibrated to alleviate inflationary pressures, not add to them”, while easing cost-of-living pressures on households.
The anticipated increase in spending will likely stir debate over whether the budget adds to inflation.