Australian federal budget may surprise with small surplus
A range of factors explain the budget turnaround but the biggest two are the booming jobs market and inflation.
Timing is everything in politics and it seems that Australian Prime Minister Anthony Albanese’s timing is exquisite.
In what looks like one of the greatest federal budget turnarounds of all time, this year’s budget now looks set to recover from what was initially forecast to be an $80 billion deficit to what may turn out to be a small surplus.
A range of factors explain the amazing turnaround but the biggest two are the booming jobs market and inflation, which might be devastating household budgets but is ramping up tax receipts nicely.
Not due to cost cutting
It is certainly not just a case of reward for strict budget discipline, with expenditure in areas such as the NDIS blowing out so much that it has been labelled “unsustainable” by Mr Albanese himself and faces a total rethink.
There are plenty of other spending blowouts set to hit in future years too, including aged care (due to big wage rises), and in health and defence – think $368 billion on new submarines alone.
For now, most of the blowouts have been more than covered by the booming jobs market, which has been boosting tax receipts at the same time it has been saving money on welfare payments due to low unemployment of 3.5%.
A $17b upgrade
Inflation has been helpful too, with high prices for coal, gas and iron ore lifting exports and helping to push company tax payments to $100 billion so far this year – more than $7 billion ahead of forecasts.
Individual taxpayers have also contributed $212 billion, which is almost $10 billion higher than expectations.
Inflation has also boosted a range of indirect taxes, including the GST while the return of overseas students and migrants has also pushed up the tax take.
Set for a small surplus in July?
At the end of this financial year in June, all of this means that the federal budget could post a very unexpected small surplus – the first one since way back in 2007-2008 before the GFC intervened – which will offer increased financial and policy flexibility for Mr Albanese and Australian Treasurer Dr Jim Chalmers.
It will be interesting to see the deficit/surplus position for 2023-2024 when it is released with that federal budget on 9 May – although most pundits think the projection will still be for a substantial deficit of around $40 billion.
If there is a slight timing issue for Mr Albanese, it is the fact that bringing in a budget surplus from now on as we approach the next election is going to get a lot harder.
Budget position will worsen in run up to next election
The sugar hit of returning activity following on from the COVID lockdowns and booming commodity prices won’t last forever and even the low unemployment rate could turn around – particularly if the Reserve Bank of Australia slips up and raises official interest rates too high for too long.
On the spending side, the challenges of the NDIS, defence and health will only increase and any rise in the unemployment rate will see higher welfare payments as well, effectively clamping down on the “jaws” of future budget surpluses.
The structural deficit is hiding rather than disappearing but Mr Albanese will gratefully accept even a one-off surplus surprise and maintain the challenge of continuing budget discipline whatever the economy serves up.