- A stronger economy than that expected at the time of the March 2022/23 Budget is helping deliver a better‑than‑expected budget outcome for 2021/22 – as we anticipated.
- As signalled by the new Treasurer, it will be important for fiscal policy to tighten along with monetary policy to help the economy manage through this period of higher inflation. Full details of the government’s fiscal strategy will be provided in an updated 2022/23 Budget on 25 October.
- The 2021/22 Budget deficit could now come in approx. $A40bn lower than the most recent estimate of $A79.8bn, with the deficit to May 2022 almost half as large as previously expected.
- We would also expect the improved starting point for the Budget to carry forward into 2022/23, holding out hope that the deficit for the new financial year could be lower than the current $A78bn estimate. However, this positive outlook may be negatively impacted by lower commodity prices in the year ahead and a slower economy as interest rate hikes bite.
A stronger economy means a lower budget deficit
The new Treasurer, Dr Jim Chalmers, has set 25 October as the date for a fresh 2022/23 Budget, which will update the budget position, outlook and all the key economic variables that were contained in the original 2022/23 Budget of the previous government.
Treasurer Chalmers has already been publically discussing the need for fiscal policy to aid the Reserve Bank (RBA) in the fight against high and rising inflation – that is, both monetary and fiscal policy will need to tighten in the near‑term to help the economy combat the higher inflation trend.
This is very much in‑line with our views, where back in April 2022 we stated that “it will be important that fiscal policy is allowed to tighten via the automatic stabilisers in 2022/23 and beyond – as this will help limit the need for higher interest rates and help contain the risks from higher inflation.” See here for our previous note.
At the time, we also stated that “the better economic outlook points to Budget deficits…that could be meaningfully lower than those set out in the recent 2022 Budget.” Fortunately, this is exactly what is happening.
As shown in the table over, for the year to May 2022 the cumulative underlying cash deficit has come in at $A33.4bn (‑1.4% of GDP). This is a whopping $A27.1bn lower than the estimated budget deficit profile up to May 2022 of $A60.5bn (‑2.6% of GDP).
On current estimates, the 2021/22 budget deficit could come in around $A40bn lower ie. at approx. $A40bn (‑1.7% of GDP), compared to the Budget‑time estimate of $A79.8bn (‑3.5% of GDP).
Most of the improvement in the budget position up to May 2022 has come from the revenue side. Total revenue to May was $A525.7bn, some $A16.2bn better‑than‑expected as at the eleventh month of the year.
CBA’s Global Economic and Markets Research team publishes a wide range of economic and financial research each week covering the latest data, trends, policy developments and topical issues in Australia and other major economies. To access these publications please visit the GEMR website.
Our Economic Expert
Stephen Halmarick is Chief Economist and Head of Global Economic & Markets Research at Commonwealth Bank of Australia. He was appointed to the Chief Economist role in April 2020 – having been the Head of the Global Economic & Markets Research team since January 2018. Stephen is responsible for the team of economists and strategists that cover Australian Economics, International Economics, Rates, Fixed Income, Foreign Exchange, Credit and Commodities research. Stephen is also a key spokesperson to clients and media on macroeconomic themes and a broad range of financial market issues.