Could we get a second Budget surplus?
Sometimes conservative budgeting can deliver a positive surprise and that is fast looking to be the case with the 2023/24 Federal Budget.
While the conservative Treasury officials forecast that this year’s Budget would fall back into deficit to the tune of $13.9 billion, many observers are now predicting that could be well wide of the mark and the Budget could even manage to record a second consecutive surplus, although perhaps not as high as last year’s anticipated but not yet announced $20 billion surplus.
Even though it is early in the financial year, the official version has already been shown to be too conservative with commodity prices holding up a bit better than the gloomy predictions.
Commodity prices holding up better than predicted
Treasury had expected the iron ore price to fall from $US117 in March 2023 to just $US60 a tonne by the middle of 2024 and that the price of coking coal would fall from US$342 a tonne to US$140 by mid-2024.
That is looking less likely with Westpac predicting that the iron ore price will hold up at US$91 while coking coal should hold up at US$235.
Those perhaps more realistic forecasts led Westpac chief economist Bill Evans and senior economist Andrew Hanlan to predict a Budget surplus of $11 billion this financial year, followed by a smaller-than-forecast $16 billion deficit in 2024-25.
Falling prices slower than expected
While commodity prices have been weakening as predicted by Treasury, the fall has been slower than they anticipated and the Westpac scenario has the commodity prices falling more slowly and settling higher than the Treasury predictions.
While the final budget outcome for 2022-23 is not due until the end of September, Mr Evans and Mr Hanlan estimate it will reveal the federal government recorded a $22 billion surplus, the first one in 15 years.
Overall, Westpac said the federal government’s budget position would be $62 billion better over the three years to 2024-25 than Treasury forecast at the May budget.
Strong jobs and company profits helping too
Other analysts have pointed to the strength of the labour market and company profits as factors that might provide an upside to tax collections, which would also increase the chances of getting a Budget surplus in 2023/24.
These rosy forecasts are not a ticket to apathy, however, with the Budget still facing plenty of headwinds in the longer term due to serious structural issues that have led to a persistent mismatch between forecast spending and expected tax revenue.
These factors include the rapidly rising cost of the National Disability Insurance scheme, the growing interest bill on federal government debt and rising spending on health, aged care and defence.
Demographic changes are hurting the Budget projections as well, with the progressive retirement of the large Baby Boomer cohort putting pressure on both the spending and taxing sides of the Budget, leaving a smaller working population to pick up the tax burden of rising welfare costs.