Commonwealth budget - "project re-election"

Kieran Davies

Coolabah Capital

The main aim of the 2022-23 budget is to boost the government’s chance of re-election, where the prime minister is widely expected to call an election by this weekend for either 14 or 21 May. 

Polls and market pricing are both probably less accurate than usual given how many independents are running for parliament, but continue to point to a change of government. 

A post-budget Newspoll should be published by Sunday, while market odds have tightened a little in the government’s favour over the past week to about LNP 27%/ALP 73%. 

 The Treasury is required to publish a pre-election budget update not long after the election is called, but it will be a photocopy of tonight’s statement. 

If there is a change in government, the ALP has indicated that it will deliver a new budget, presumably in either July or August, although it no longer seems likely to shift the responsibility for fiscal policy and economic forecasting from Treasury to the Parliamentary Budget Office. 

Regardless of the election outcome, both sides of politics plan to review the performance and aims of the Reserve Bank later this year.

The fact that this is an election budget is brought home by the government is planning to spend about half the very large economic windfall on new policies in 2022-23. 

That is, the underlying budget deficit is now forecast to narrow from $134bn in 2020-21 to $80bn in 2021-22 (previously $99bn), holding near that level at $78bn in 2022-23 (previously $99bn) before narrowing to $43bn by the end of the forecast horizon in 2025-26 (previously $68bn). 

The stronger-than-anticipated economy has delivered a windfall of $28bn in 2021-22, building to $38bn in 2023-24, with new government measures using up $9bn of the 2021-22 windfall and $17bn of the 2022-23 windfall. 

Most of the economic windfall has come in the form of stronger-expected-revenue given a strong labour market and buoyant commodity prices, where CCI's analysis of monthly financial data suggest that the budget will likely end up beating the revised starting point in 2021-22. 

The election handouts include a variety of new measures, such as a one-off “cost of living tax offset" (worth $3.9bn in 2023-23), a temporary six-month reduction in fuel excise (costing $2.8bn in 2021-22 and $2.9bn in 2022-23), a one-off cost of living payment to some welfare recipients ($1.4bn in 2021-22), delaying the uplift factor for PAYG and GST tax instalments ($1.9bn in 2022-23), and a change to the subsidy for medicine ($0.6bn in 2022-23).  

There is also increased spending on infrastructure and defence over the next ten years, mostly outside the government's key four-year forecast horizon. 

There is a $3bn provision over four years for costs related to the tragic floods in New South Wales and Queensland .  This looks to mainly cover the Commonwealth's direct assistance to households and business as the government stresses that the cost of reimbursing 75% of state disaster spending is currently unquantifiable.  

The government's long-term "projections" show a further narrowing in the budget deficit, but the long-term estimates should be largely ignored given the great difficulty the government in forecasting the budget outcome in the current financial year. 

Long-term forecasts are thought by policy-makers to impose some fiscal discipline on government, but there is no evidence to support this idea. 

The main uncertainty around the budget remains COVID, where a new variant could emerge given very low vaccinations rates in many emerging economies. There are also substantial tail risks around Russia’s invasion of Ukraine, as well as significant geopolitical risks in Asia.

The AOFM subsequently issued updated issuance plans, revising down forecast gross nominal Treasury bond issuance in 2021-22 from $105bn to $100bn.  Gross issuance for 2022-23 will be $125bn, which masks a large improvement given there are significant bond maturities that financial year.    

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Kieran Davies
Chief Macro Strategist
Coolabah Capital

Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...

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