Budget Monitor: A forecast miss becomes a fiscal plan
Despite the gloomy economic backdrop, the Federal Budget is in its strongest position since the Howard-Costello years.
In the lead up to the release of the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO), the Australian economy is in a precarious position. The economy is growing, but that is largely due to population growth. Economic activity per capita is in retreat and there is a growing sense that Australians are no longer ‘getting ahead’.
Yet despite that gloomy backdrop, the November edition of Budget Monitor estimates that the Federal Budget is in its strongest position since the Howard-Costello years. Federal taxes are mostly levied on nominal income and spending. While a high inflation environment has put pressure on household budgets, it has also delivered strong growth in the government’s tax base.
As a result of cyclical economic tailwinds, Deloitte Access Economics expects the 2023-24 MYEFO to reveal over $70 billion worth of additional revenue over the next four years, compared to the budget forecasts released in May. Conservative commodity price assumptions from the 2023-24 Budget are likely to be outperformed, while high inflation, a strong labour market and a sugring population are likely to grow the personal income tax base beyond expectations.
Upward revenue revisions are just one part of the story. The other part is the Government’s approach to banking, rather than spending, upside surprises in revenue. This approach helped secure a larger-than-expected surplus in 2022-23. And based on policy announcements to date, Deloitte Access Economics now anticipates a small underlying budget surplus of $2.4 billion in 2023-24.
The Government’s fiscal strategy appears to project spending in line with relatively conservative revenue projections, and then the stick to those spending projections when revenue outperforms. That strategy is good at dealing with debt in the short term. Net debt is now expected to average around 20% of gross domestic product (GDP) over the next four years, compared to a forecast of around 23% of GDP in the Budget. But the strategy doesn’t do enough to address Australia’s long term fiscal health.
Chart 1: Net debt as share of GDP
The 2023 Intergenerational Report highlighted that the cost of the ‘fast five’ government spending categories (health, aged care, the National Disability Insurance Scheme, defence and interest costs) are expected to grow by 5.6 percentage points of GDP over the next 40 years. Government revenue is expected to grow by just 1.0 percentage point of GDP in that time. Relying on a fast-growing nominal economy and upside revenue surprises is not an adequate strategy to address that long run fiscal challenge.
The November edition of Budget Monitor analyses three alternative tax policy settings that were first put forward by Deloitte Acces Economics in May 2023: a simpler and lower personal income tax, a broader and higher GST (with compensation for welfare recipients), and a reduction in the capital gains tax discount.
These policies are examples of balanced, meaningful and achievable reforms that would place the budget on a firmer structural footing. Deloitte Access Economics estimates that the three reforms would add $377 billion in revenue over ten years and shift the budget into surplus through 2029-30.
Critically, these reforms would do more than just alleviate the structural budget deficit. They would simplify the tax system, lessen the burden of our tax system on productivity, and help solve some of the equity issues and intergenerational concerns stemming from our current tax system.
Reform is always easiest from a position of fiscal strength. As cyclical tailwinds deliver a stronger-than-expected bottom line for the second consecutive year, there is an opportunity to do much more for Australia’s long run fiscal health.
This newsletter was distributed on 30th November 2023. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Daniel Weber, Manager at Deloitte Access Economics.
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