Budget 2022-23: economic overview

Federal budgets should be an opportunity for government to provide some vision and chart a course to improve the country’s economic and social prosperity over time.

In reality, because budgets are set and reset every 12 months, they have become an annual compact between government and society. However, the 2022-23 Budget takes short-termism to an extreme, with its centrepiece – a temporary cut to the fuel excise – something which wasn’t really on the agenda more than three weeks ago. A missed opportunity to set out an economic vision to say the least!

The Budget does chart the rebound in Australia’s economy, and this flows through to government revenues. The stronger-than-predicted economy is forecast to tip a whopping $153 billion of receipts back into Treasury's pockets between now and 2025-26, a big step up on the official forecasts released just three-and-a-half months ago.

But there’s $39 billion in spending on new policies – including one-off payments and tax cuts – being handed back to families and businesses. Most of that shows up over the next six months – a period which, coincidentally, includes an election.

That still leaves a healthier bottom line – with the underlying cash deficit forecast to be $79.8 billion in 2021-22, $19.4 billion better than forecast in the December 2021 Mid-Year Economic and Fiscal Outlook (MYEFO), and a $78.0 billion underlying cash deficit forecast for 2022-23.

While the projected budget deficits are smaller than they used to be, they’re still big. And going forward they don’t yet fully reflect some ‘known knowns’, including cost pressures in both defence and social services.

The best news in the Budget is the economic backdrop, particularly on jobs.

Initially the federal government was simply aiming to get unemployment back under 6%. Now the nation is only months out from an unemployment rate of 3.75%. The new forecasts include 140,000 extra jobs in the middle of this decade than the earlier ones did, so Treasury doesn’t just think unemployment is lower today, it sees fewer unemployed (and more employed) on a sustainable basis.

The Budget is also benefiting from the fact that the world is throwing more money at Australia than ever before. Usually the world gives Australia a pay cut in global recessions, marking down the price of the things we sell to others.

But not this time. Relative to import prices, export prices spent most of 2021 at record highs – higher than at the top of the resources boom a decade ago.

Then came the war. Australia sells the world energy and food and, between them, so do Russia and Ukraine. But Russia’s war on Ukraine has sidelined them both, leaving the world scrambling for Australian gas and coal, and boosting iron ore and wheat prices too.

Every week that today’s coal and iron ore prices are maintained close to these levels adds another $5 billion to national income, of which $1 billion goes to the Australian Tax Office.

That economic backdrop – the faster recovery, and record prices for our key exports – means that the ‘rivers of gold’ are back. There’s been a huge leap in national income, which in turn means there’s been a huge leap in the tax take.

That strong economic backdrop might prompt some concerns about the intergenerational fairness of this Budget. Even with what is effectively full employment and very strong commodity prices, future taxpayers are subsidising Australians in 2022-23 to the tune of $80 billion, or 3.6% of GDP. Will future taxpayers look back and view the quality of the 2022-23 Budget spend as a good investment?

A further concern is that the better-than-budgeted outcomes of the moment may be temporary because the economy has repaired faster than expected and because commodity prices keep getting lucky.

But that first factor fades over time – Treasury’s official forecasts always expected repair, it’s just that the pace of repair has exceeded expectations

And the second factor is also only a temporary tailwind. Russia’s invasion of Ukraine has again sent key commodity prices on a moonshot but, sensibly, Treasury assumes the record prices of the moment won’t linger for long

In other words, Australia as the ‘lucky country’ may become less lucky over time. 

Click here to see our detailed Budget analysis.