The 2023-24 Budget’s expected modest surplus of $4.2 billion is a welcome consequence of recent tailwinds: favourable commodity prices, a strong labour market and a large rebound in migration, particularly this year.
The Australian economy outperformed Treasury’s forecasts from last October, which added an estimated $134.8 billion in revenue in 2022-23 and the following four years through a surge in both company tax and personal income tax.
Chart 1: Underlying cash deficit estimates, October 2022 and May 2023 Budget
Source: Budget October 2022-23, Budget 2023-24
One of the questions going into this Budget was whether the government would spend or save the unexpected surge in tax revenue. The government rightly opted for fiscal constraint and returned 82% of the revenue upgrades to the Budget bottom line with spending forecast to be $26.7 billion higher over the five years to 2026-27.
The $42.6 billion in new policy measures includes a headline $14.6 billion cost-of-living package. The package contains a range of relatively modest payments for low- and middle-income families including energy bill savings, cheaper medicines, and increases to JobSeeker. But those support payments are relatively modest – such as a $40 per fortnight increase in the JobSeeker allowance – as the Budget seeks to tread the line between providing much-needed relief to struggling households without stoking inflation.
The package also includes measures targeted at alleviating the highly constrained housing and rental markets, including a modest 15% increase in rent assistance, measures to boost builds of new homes, and more support for first home buyers. While the increase in rent assistance will be a welcome relief for many families in the short term, boosting supply is the underlying answer, and that will still take some considerable time. In Deloitte Access Economics’ latest pre-Budget forecasts, housing construction starts were expected to fall, with the number of new builds in 2023 estimated to be some 21,000 below 2022 levels and 70,000 below 2021. On these numbers, new housing supply would just barely keep pace with population growth, let alone ease a critical undersupply.
Elevated inflation, negative real wage growth, and the RBA’s rapid tightening cycle are causing financial pain for many households. However, it was critical for this Budget to strike the balance between targeted cost-of-living relief and making sure fiscal policy is helping (or at least not hindering) the work of the central bank.
Eventually, the government will have to turn to the more difficult task of restoring the Budget’s structural health and the finding the right fiscal settings for Australia’s long-term prosperity.
The unexpected improvement in the near-term fiscal position provides the perfect opportunity to fund more significant reform going forward.
Click here to see our detailed Budget analysis.
This blog was co-authored by Chelsea Boone & Dan Weber.
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