Only a collapse in commodity prices or a sharp rise in unemployment – and probably both – will prevent the Albanese government from delivering back-to-back budget surpluses.
Jim Chalmers’ challenge as treasurer will be to fend off the inevitably rising demands to share some of his good fortune with households set to face a prolonged squeeze likely to last until mid-2025, when the next federal election must be held.
The government’s prediction of a deficit of just $1.1bn is a rounding error in a budget which projects receipts of $685.3bn for this fiscal year, according the mid-year economic and fiscal outlook released on Wednesday. Those receipts alone are $17.2bn higher than projected in the May budget for the 2023-24 year.
The Treasury’s in-built conservatism when it comes to commodity prices is partly why a surplus can confidently be predicted (and why banks including CBA expect it will come close to matching the $22.1bn surplus pocketed for 2022-23).
Iron ore prices, for instance, were averaging US$105 a tonne in the September quarter of this year, and were trading above US$135/t yesterday. Treasury has them dropping back to US$60 as it always does. Every US$10/t discrepancy adds or cuts $5.3bn to nominal GDP and $500m for the budget.
Coking coal prices, too, are forecast to slide 88% and thermal coal to more than halve, collapses that don’t seem likely.
Indeed, in explaining why inflation has lately surprised on the upside, the Treasury has “updated” its forecast for the Singapore-based Tapis oil price that serves as a proxy for petrol prices in Australia.
It now expects Tapis to average US$96 a barrel for the year, up 10% from its May expectation of US$87/barrel. Since Australia’s coal and gas prices are linked to global energy prices it seems even more incongruous than usual to expect a reversion to some long-term (and outdated) level.
Commodity prices gyrations, of course, are only one of the challenges for households struggling to keep up with rising mortgage costs as higher interest rates flow through.
In the September quarter household consumption was flat and the Myefo forecasts don’t expect things to improve much.
In fact, consumption on the home front will expand just 0.5% this fiscal year, slower than 1.5% predicted in the May budget. Next year’s trend is a bit friendlier, with 2% expansion forecast but that’s also a half percentage point down on the May prediction.
“The household saving ratio has fallen in recent quarters and is expected to average 2% in 2023-24, its lowest annual level since 2007-08,” Myefo notes. “It is also likely that some households are needing to draw upon previously accumulated savings to support their consumption and service mortgage costs.”
The report notes that expectation among economists that the Reserve Bank’s cash rate of 4.35% is “at or near its peak”. The higher cash rate profile, compared with the May budget’s peak rate forecast of 3.85%, “will act as an additional drag on consumption and dwelling investment over coming quarters”, it said.
The independent RBA, of course, makes the call on the official interest rate. It’s notable that the government’s inflation forecasts don’t quite gel with what the central bank expects.
According to Myefo, the headline consumer price index will slow from 3.75% by next June to 2.75% by the middle of 2025. In other words, that’s within the 2% to 3% target the RBA is targeting.
The difference, though, is the RBA is so far not expecting CPI to slow to 3% until the end of 2025.
The discrepancy is likely to be material for the budget – assuming the RBA’s model is more accurate. (The Treasury lifted the June 2024 CPI rate by half a percentage point versus its May forecast but did not change where it expected it to land a year later.)
Higher inflation has been a key reason for the budget’s improved underlying cash position and to the extent the Treasury has underestimated it, revenues will be higher through bracket creep – as we saw clearly in the national accounts for the September quarter.
Will those squeezed households tolerate being under the pump while the budget coffers swell? That may hinge on how wages and jobs go.
Myefo does predict the economy rebounding a bit next year. Gross domestic product will expand 1.75% this fiscal year – slowing from 3.1% last year – and quicken to a 2.25% pace in the 2024-25 year. Not great, but no recession.
The labour market, though, should hold up relatively well. The jobless rate, now at 3.7% as of October, should creep up to about 4.25% by next June, a Myefo estimate in line with the May budget’s prediction.
By the end of June 2025, that rate will be at 4.5%, a level still better than most treasurers have gone to an election with over the past five decades. Incomes should also return to real growth early in 2024 for the first time in three years.
