Treasurer Jim Chalmers handed down his first Federal Budget on 25 October 2022. Touted as a bread-and-butter Budget, it has contributed to resetting the economic agenda and the discussion about how to fund Australia’s structural deficit and debt repayment obligations at a later point in time.

The pandemic, Russia’s invasion of Ukraine, strained supply chains, heightened world security issues and rising inflation have all painted an uncertain economic future, with real GDP growth being revised down to 1.5% in 2023-24.

Issues that have taken centre stage include costings of election commitments, under funding of existing programs and rebalancing of expenditure due to the so-called waste and rorts audit. With interest payments, NDIS, aged care, hospitals, and defence expenditure increasing rapidly, questions of how to fund the long-term structural deficit are coming to the fore.  

It is unclear whether the Government will address long-term taxation reform in the May 2023 Budget.  But it is highly likely that stage 3 tax cuts and the low- and middle-income tax offset for individuals will be debated before the next Budget, as well as the continuation of the instant asset write-off and carry back of losses for business. 

What is the state of Australia’s economy?

Real GDP 

Australia is in for a tough couple of years.  Real GDP is expected to plummet from 3.25% in 2022-23 to 1.5% in 2023-24 before increasing to 2.25% in 2024-25. Medium-term projections have reduced the long run productivity growth assumption from the 30-year average of 1.5% to the 20-year average of 1.2%. 

This highlights the financial impact of the productivity challenge that Australia is facing and impacts the Budget structural deficit.

Inflation 

This is expected to peak at 7.75% in the December quarter of 2022 and to persist for longer due to higher energy prices that add to about 1% of the inflation rate. Inflation is expected to decrease to 5.75% in 2022-23, 3.5% in 2023-24 and 2.5% in 2024-25 and 2025-26.  

Real wage growth 

Wage growth is expected to be negative for 2022-23, about even in 2023-24 before becoming positive in 2024-25.

Debt and interest 

Net debt at 23% of GDP is better than previous forecasts. When interest rates rise, existing securities which were issued with low coupon rates are less attractive to investors so their price on the secondary market falls. The lower market value of Government securities means that the value of net debt falls. The 2032 projection for net debt is 31.9% of GDP.

Despite the improvement in the debt position, higher interest rates have resulted in net interest payments increasing rapidly – they are the fastest increasing expenditure item in the Budget. 

Budget deficit

The budget deficit is expected to be -1.5% of GDP ($-36.9 billion) in 2022-23 and to then steadily increase over both the forward estimates and the medium term to -1.9% of GDP.  

While tax receipts increase from 22.7% of GDP in 2022-23 to 24.1% in 2032, payments increase even faster from 25.9% of GDP in 2022-23 to 27.9% of GDP in 2032. Interest is the fastest growing expenses at 14% per annum and is closely followed by the NDIS at 12.1%. Expenditure on hospitals, aged care and defence are also rapidly increasing at 6.1%, 5% and 4.4% respectively.  

The combination of increased expenditure and lower productivity means that the structural deficit – that is the budget balance that has had temporary factors removed from it – has substantially deteriorated. The below graph from the Budget papers outlines this structural budget balance.  

Source: 2022-23 October Budget Papers

This Budget seeks to understand Australia’s future expenses and revenues. It is clear that there is an uncertain future and that Australia has a significant underlying structural deficit. Tough discussions about tax reform and expenditure need to be had.