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This Budget like all of those since 2020 has again benefitted from extra revenue flows coming from higher personal tax collections due to stronger jobs growth and higher commodity prices (and hence mining profits) than assumed. This is not smart management but good luck flowing from conservative forecasts. This windfall (see the line called “parameter changes” in the next table) is estimated to reduce the deficit this financial year by $10.6bn compared to last December’s update, with a total benefit over the five years shown of $12.6bn. But this table — a more detailed version of which appears in the Budget papers and is nicknamed the “table of truth” — also shows how much of the windfall has been spent (see the line called “new stimulus”). Last year only 14% of the windfall through the forward years was spent but this budget nearly twice the windfall (i.e. $24.4bn) is being spent. As a result, while the budget now looks better for this financial year (with another surplus — which could turn out to be even bigger), because of the extra spending in subsequent years it now looks worse from 2024-25.
Due to new spending & structural pressures from interest costs, the NDIS, defence, health and aged care spending as a share of GDP is expected to average 26.2% over the longer term, well above the pre-Covid average of 24.8%. Despite a blip down with tax cuts, revenue trends up reaching its 1986-87 record of 26.2% of GDP in 10 yrs. So bracket creep, not spending restraint is assumed to do the work in getting us back to a budget balance.
After a surplus this year, there are bigger deficits over the next few years.
Gross public debt is projected to remain elevated at around 35% GDP before falling next decade.
Winners include: low and middle income households; pensioners; women; medicine users; aged & child care workers; low income renters; students; apprentices; home builders; students; defence; critical mineral projects; and clean energy manufacturers. Losers include: consultants, universities, foreign students, backpackers and dodgy NDIS providers.
The positives in the Budget include: another surplus; the cost-of-living measures will help ease pressure on the most vulnerable and some will lower measured inflation with a second round flow on to lower indexed price rises and inflation expectations; tax breaks & streamlined approvals should help boost medium term business investment; & there is still scope for revenue to surprise with commodity price assumptions.
However, the Budget has several significant weaknesses in relation to:
The direct lowering in measured inflation from cost of living measures will be welcomed by the RBA, but it will be wary of the rise in new stimulus. The net effect adds to the risk of higher for longer interest rates, but is probably not enough to change our forecast for a rate cut later this year.
Cash and term deposits — cash and bank deposit returns have improved substantially with RBA rate hikes and the Budget won’t change this much.
Bonds — another surplus takes pressure off bond yields, but this is offset by higher medium term deficits…so there is not much in it.
Shares – the Budget is positive for spending and hence retail shares, but this may be offset by higher than otherwise rates. Some manufacturers may benefit from FMIA. Overall, it looks neutral for shares.
Property — the housing measures are unlikely to alter the home price outlook which is dominated by supply shortages & high rates. We see modest home price growth this year.
The $A – the Budget is unlikely to change the direction for the $A.
Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP
Diana Mousina – Deputy Chief Economist, AMP
My Bui – Economist, AMP
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