Australia’s center-left Labor government is taking a path of fiscal restraint as it tries to strengthen its economic credibility and buttress the central bank’s efforts to rein in elevated inflation.
Treasurer Jim Chalmers told parliament Tuesday evening the budget would record a slim surplus of 0.2% of gross domestic product this fiscal year, a more than A$40 billion improvement on forecasts in October. But as rising interest rates slow the economy, the government’s books return to the red, with a deficit of 0.5% of GDP seen in fiscal 2024, swelling to 1.3% the following year.
The surplus “represents a fiscal contraction that is helpful in moderating the inflation pulse running through the economy,” said Stephen Halmarick, chief economist at Commonwealth Bank of Australia, the nation’s largest lender. “But the move back to deficit in 2023/24 represents a loosening.”
The Australian central bank’s 3.75 percentage points of rate hikes in the past 12 months, combined with a spike in the cost of living, has hit households hard. That’s forced the government to adopt a careful strategy of fiscal prudence to avoid further inflaming inflation pressures, while providing extra cash to help shield the most vulnerable people.
“The inflation challenge has been front and center in our budget considerations,” Finance Minister Katy Gallagher told Bloomberg Television’s “Inside Australia” in an interview at Parliament House on Wednesday.
“We’re very confident, and the clear advice from Treasury is, that our decisions are not adding to inflation. In fact on the energy price package, which is largely the caps and the direct support for households and businesses, that has a deflationary impact .”
The government’s coffers have been swelled by revenue from high commodity prices and a fully-employed economy, with unemployment hovering near a 50-year low of 3.5%. The budget shows both of those strengths unwinding somewhat, with the jobless rate seen climbing to 4.25% by June 2024.
Still, the budget’s broader parameters have been improved by stronger than expected population growth, which is now forecast at 2% in 2022-23 and 1.7% in 2023-24, up from 1.4% in those years forecast in the October budget.
Australia remains among a handful of nations that hold a coveted AAA credit rating from the three major companies. Tuesday’s fiscal blueprint has already received approval from two of those.
“The government’s commitment to fiscal discipline, such as saving revenue upsides, remains critical to our ‘AAA’ rating,” S&P Global Ratings said in a statement, while Moody’s Investors Service said the budget’s move toward fiscal repair “is credit positive.”
The budget’s improved position has seen borrowing expectations scaled back, with net debt forecast at 24.1% in June 2027. Based on the budget forecasts, issuance of Treasury Bonds in 2023-24 is expected to be around A$75 billion, the Australian Office of Financial Management said.
The Reserve Bank has raised its cash rate 11 times to 3.85% — a level not seen since April 2012 — and signaled a willingness to hike further to ensure consumer prices return to its 2-3% target. Treasury forecasts inflation will cool to 3.25% next fiscal year, from an estimated 6% this year, slightly below the central bank’s estimates.
While the government insists its fiscal program will not add to inflation, a number of economists argue its four-year, A$14.6 billion package to help households with the increasing cost-of-living pressures will intensify pressure. The center-right opposition coalition takes a similar view.
“I think it is inflationary and we needed a budget right now that’s putting downward pressure on inflation,” Angus Taylor, shadow treasurer, told Bloomberg Television at Parliament House on Wednesday. “If you’re relying purely on monetary policy to deal with inflation, it’s very painful.”
Australia’s budget outlook is well ahead of G-20 counterparts, whose average deficit is forecast to climb to 5% of GDP this year, according to the International Monetary Fund. The US budget deficit is currently 6.9% of GDP while fiscally cautious Germany’s is at 2.6%, according to data compiled by Bloomberg.
One upside for Australia is a sharp rebound in its biggest trading partner, China. Treasury said the world’s second-largest economy will expand 5.75% in 2023, or “comfortably above” Beijing authorities’ 5% target.
On top of that, part of the reason for budget deficits widening to 1.3% of GDP in fiscal 2025 and 2026 is that the forecasts are based on commodity prices returning to long-term estimates.
What Bloomberg Economics Says...
“The projected return to deficits is a function of conservative commodity price assumptions, rather than a shift to a more supportive fiscal stance”
— James McIntyre, economist
To read full note, click here
Chalmers maintains the fiscal picture will be challenging in the years ahead against the backdrop of a global economy that’s weakening under the weight of a global policy tightening cycle. In addition, Australia’s aging population and rising demand for services like health will increase budget costs.
“Unfortunately, we’re still missing a long-term plan that drives a sustainable and economically certain future,” said Gavan Ord at CPA Australia.
--With assistance from Paul Allen.