Economic overview: Mercer's Australian Federal Budget 2023-24 analysis and insights 

02 February 2023

Economics overview

Against a backdrop of elevated rates of inflation, strong labour markets and rising interest rates, the Labor government has sought to be careful in delivering a Budget that seeks to provide assistance for cost-of-living pressures whilst not seeking to add to inflationary pressures. Broadly, the Budget appears unlikely to add to existing inflationary pressures in the near term, with new spending measures balanced by additional revenues or reshuffling previously earmarked expenditures elsewhere Equally, with the absence of significant new policies, the Budget is unlikely to have a material impact at the macroeconomic level. 

Labor’s 2023-24 Budget sees aggregate expenditure of $682.1bn against receipts of $668.1bn, resulting in a projected surplus of $4.2bn or the equivalent of 0.2% of GDP, making it the first surplus budget in 15 years, benefiting from the recovery in employment and the rise in iron ore prices over the past year. However, the Budget is expected to turn into deficit again over the next four years.

The Budget includes a number of initiatives including:

  • A cost-of-living package including a $3bn energy bill relief package with households eligible for up to $500 and small businesses up to $650 in the form of rebates to be provide in conjunction with state and territory governments, commencing from July this year.
  • Support to housing including a 15% increase to the maximum rate of Commonwealth Rent Assistance (stated to be equivalent to $31 extra per fortnight) and a rise in the capital works depreciation rate on newly built-to-rent homes from 2.5% to 4% per year.
  • A 15% pay increase for aged care workers commencing 1 July, worth $11.3 billion. The increase equates to around $7,000 p.a. on average for each worker to eligible people.
  • JobSeeker, Austudy and Youth Allowance payments to increase by $40 per fortnight.
  • An expansion of Parenting Payments (Single) to allow single parents to receive financial support from the government until their child is 14 of age (from 8 currently), projected to cost $1.9bn over 5 years from 2022-23.
  • Reform of Pharmaceutical Benefits Scheme (PBS) to allow the purchase of 60 days’ worth of medicine from a single script (compared to 30 days currently) for over 300 medicines commencing 1 September 2023.
  • Reforms to Medicare worth $5.7bn over 5 years from 2022-23 including tripling the bulk billing incentive for patients under the age of 16, pensioners and concession card holders.

Other initiatives include:

  • ParentsNext program, which required parents to undertake parenting programs or job training, to be abolished.
  • A $20,000 instant asset write-off for small businesses for energy saving investments.
  • Reforms to the National Disability Insurance Scheme (NDIS), which has been one of the fastest rising components of spending in the Budget rising 14% over the past year, now having a cap on its increase to 8% p.a. by 2025-26, already agreed by national cabinet.
  • Reforms to the Petroleum Resources Rent Tax (PRRT), introducing a cap on allowed the use of tax credit to offset assessable income which the Budget is project will boost tax revenues by $2.4bn over the next 5 years commencing 2022-23.
  • Increasing the excise on cigarettes each year for the next 3 years commencing 1 September 2023, expected to generate $3.3bn in additional revenues over those 3 years.
Total government receipts are projected to reach $668.1bn or 25.9% of GDP over 2023-24, compared to $621.4bn from the October Budget estimates. This is projected to decline to 25.2% of GDP by 2025-26. Government payments are projected to rise to $682.1bn in 2023-24, equivalent to 26.5% of GDP, which compares to $665.5bn from the October Budget estimates, expected to rise slightly in 2024-25 to 26.8% before declining steadily to 26.1% of GDP by 2026-27. 

Chart 1: Australian Government Receipts and Payments

Source: Commonwealth Government, Mercer
The underlying cash balance for 2022-23 is projected to be a surplus of $4.2bn (0.2% of GDP), which is an upgrade of $41.1bn compared to the estimate from the October 2022, with the Budget benefiting from stronger iron ore prices and stronger employment. This is projected to deteriorate to an estimated deficit of 1.3% of GDP for 2024-25 and 2025-26 before declining to 1.0% of GDP by 2026-27.

Chart 2: Underlying Cash Balance

Source: Commonwealth Government, Mercer
Estimates for both gross and net debt have been revised down relative to October Budget projections. Net debt is now projected to reach $574.9bn or 22.3% of GDP by June 2023 and is expected to rise to 24.1% by June 2027, before declining to 19.9% by June 2034. This places the level of the Australian government’s debt to GDP at very low compared to most other countries. 

Chart 3: Australian Government Net Debt

Source: Commonwealth Government, Mercer
Relative to the October 2022 “mini-Budget”, forecasts for growth and been little changed, with growth and inflation both expected to slow. Specifically:
  • Australia’s real GDP is expected to be 1.50% for FY23/24 and 2.25% in FY24/25 (both unchanged from the October Budget)
  • The CPI forecast is 3.25% for FY23/24 (vs 3.5% in the October Budget) and 2.75% for FY24/25 (vs 2.5% in the October Budget)
  • The unemployment rate for 30 June 2024 is projected to be 4.25% (vs 4.50% in the October Budget), albeit projected to be unchanged for 30 June 2025 at 4.50%

This is similar to the forecasts from the Reserve Bank of Australia (RBA), who are expecting growth and inflation to slow to 1.5% p.a. and 3.5% p.a. respectively by 2023/24. Our view is more cautious on the outlook, and we are expecting a mild recession in the near term, driven by the high level of household indebtedness and the rapid and significant rise in mortgage rates to date likely to impact consumption in the quarters ahead. 

On inflation, whilst there are a number of welcomed measures in the Budget, it is unclear how much impact these measures will have and how quickly such impacts will be felt. For example, the government’s increase in rental assistance and the build-to-rent depreciation allowances increase do not appear to be significant, at least at a macroeconomic level. Further, the latter tax depreciation increase will not kick in until the next financial year, and given the lags to build new homes, it is unclear how quickly such relief will come through for the approximately 30% of household who are renting. Whilst further measures are being discussed, it appears that it may be some time before rental relief eventuates. We are also expecting a moderation in the pace of inflation in the coming years, albeit with risks tilted towards a slower than faster decline in its pace.

We acknowledge a lot of factors such as low unemployment rates, high inflation and rising interest rates are global issues and that Australia has come out relatively well compared to other developed economies. The Budget would have been a good opportunity to additionally strengthen opportunities for productivity and innovation for the Australian economy in the long term but seems to focus more on easing short term cost of living pressures. 

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