Like most first budgets, this one focuses on cleaning up the mess of the previous government. But the broader picture is of making very clear to the public that the relatively rosy views of the economy made in March have been mugged by reality, and tough times are ahead.
The March budget had inflation growth of 3.5%; now it is 6.1% with tomorrow’s figures expected to be well above 7%. In March the cash rate was at the still pandemic emergency level of 0.1%; now it is 2.6%.
Back then the Reserve Bank was predicting the economy in 2022 would grow by 4.25% and next year to slow to 2%; now it only expects GDP growth this year of 3.2% and next year to grow a very tepid 1.8%.
Things have changed and, to be honest, whoever had won in May would have needed to redo the budget. This was predicted at the time. The March budget was designed purely to get the Coalition to the election and nothing further.
So, what does the redo give us?
Well, the main economic message is enjoy today because tomorrow is going to be bad, and there is a good chance it will be even worse than we hope.
The budget papers expect a sharp slowing of the economy in the next two years. This very much echoes the latest estimates by the IMF.
And, if we are blunt, there is a strong risk of a recession.
It is rare for Australia’s economy to grow by less than 2% in any 12-month period. The budget now predicts the 2023-24 year will see just 1.5% growth. That would be the slowest growth outside of the pandemic year since the 1990s recession:
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Even worse, as the budget papers note, is that the risks are very much heightened.
The Treasury predicts the major global economies won’t go into a recession but, if they do, that 1.5% growth becomes a mere 0.75%. Growth that weak over an entire 12 months would almost guarantee a recession, however you wish to measure it.
There are also risks for this year. Households are now the big drivers of the economy, with consumption in 2022-23 expected to grow by 6.5%. That would be the biggest growth since the Beatles toured in 1963-64.
That might happen because, as Treasury notes, we are beginning to start spending on services we were unable to use during the pandemic and amid border closures. But still it’s a big jump, especially at a time when inflation is rising and the risk remains that people might be spooked into not spending because they are worried about rising prices.
Inflation has not been all bad for the budget, though. The rise of commodity prices including oil and gas is the big reason the budget bottom line is looking better than it was in March.
Since the 2020-21 budget, which was drawn up when the pandemic was most dire, revenue projections have increased dramatically:
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The budget is now looking rather better than it was just six months ago … at least for this year. The budget deficit for this financial year has gone from the deficit predicted in March of $77.9bn (3.4% of GDP) to $36.9bn (1.5% of GDP).
But the big boost in commodity prices is not expected to last and the deficit in 2023-24 is expected to increase to 1.8% of GDP. This is better than was expected in March, but highlights just how big of a windfall the oil and gas prices rises have been for resource companies this year.
The March budget predicted $92.2bn in company tax this year; now Treasury expects $127.3bn.
Even with an increase in spending due to inflation raising the indexation of payments such as the aged pension and jobseeker above what was expected, that means a nice reduction in the deficit.
But it is really a one-off. In 2024-25 and 2025-26 the budget expects larger deficits than were predicted in March:
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While the government’s budget might be better for the next two years, people’s own budgets are rather more fraught.
A slowing economy means higher unemployment (the budget predicts that will rise to 4.5%) and usually worse wages growth.
The past decade has really been a bad one for wages predictions. Strong growth is always about to occur, and then reality comes along and laughs at the budget:
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The Treasury now predicts wages growth will be 3.75% by June and stay there until at least June 2024. When we line that up with slowing growth and rising unemployment it suggests some pretty extraordinary happenings.
Usually, wage growth slows when unemployment rises. Over the past six years, however, unemployment rates that would have once seen wages growing at more than 4% are now struggling to get above 3%.
Each budget suggests this relationship will change back to the old ways, and each year it does not happen.
Once again the budget hopes this will happen.
Maybe the changes to industrial relations that will see multi-employer bargaining and a reduction in the terminations of enterprise agreements during the bargaining process will enable wages to grow.
But I’d wait before banking that extra money:
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We also need to consider what is happening with inflation. The budget estimates a peak of 7.75% inflation growth by the end of this year and slowing to 5.75% by June.
This means that real wages are expected to fall:
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If the budget figures come true, real wages in June next year will be 5% below what they were in June 2019 and, by June 2026, they will still be some 3.2% below pre-pandemic levels.
That is a historic smashing of living standards. And it also highlights the savage impact of the removal of the low-middle income tax offset.
The LMTIO was increased and extended in the March budget from a maximum of $1,020 to $1,500 for those earning between $48,000 and $90,000.
Neither party committed to extending the offset during the election, which meant both the ALP and LNP went to an election committed to a 3.1% tax rise for people on $48,000. That stage-three tax cut of course remains, and it means only those earning more than $97,000 will be better off after those tax cuts have come in than they were in June this year.
The budget reveals the major risk and rough waters ahead but also the massive amount of work still to be done to undo the damage of the past decade.
