The NSW and Victorian budgets are on track to substantially beat state forecasts

Kieran Davies

Coolabah Capital

The NSW budget shrugged off omicron,  almost returning to balance in January in trend terms. The deficit is likely to beat the government's full-year forecast by about $4bn to $5bn, even allowing for the costs of recent tragic flooding.  The Victorian budget has echoed the NSW result, narrowing sharply in Q4 and on track to beat the state's full-year forecast by about $2bn. 

The NSW budget has been very volatile over recent months even after seasonal adjustment, but has shown further significant improvement despite the omicron outbreak. 

In trend terms, the deficit narrowed from about $1bn in December to almost balance in January. This remarkable result is the best outcome since 2018 and compares with much larger trend deficits of about $3-3½bn per month during the delta outbreak, although the economic impact of the earlier outbreak was much larger and there was generous government assistance to both households and businesses. 

The improvement in the budget over recent months mainly reflects stronger revenue, but payments have fallen and are broadly back at pre-delta levels. 

The budget is likely to substantially undershoot government expectations even factoring in the economic and fiscal cost of the tragic floods in northern New South Wales.  The government had forecast a deficit of $30bn for 2021-22 as a whole, but the rolling annual sum of the monthly numbers shows the deficit over the past twelve months has narrowed from $25bn in October/November to $21bn in January. 

Conservatively allowing for about $5bn in assumed government assistance and economic fall-out from the floods, as well as some delayed omicron financial assistance, the deficit could come in about $4-5bn better than the government’s full-year forecast of $30bn.  There are upside risks to this estimate if the economy continues to rebound over the remainder of the financial year.

Importantly, the Commonwealth will eventually reimburse 75% of the state’s direct disaster costs, which means that the budget will improve when those payments are made in arrears. 

Victoria budget beats government forecasts as well

The Victorian budget has echoed the New South Wales results, also tracking ahead of government expectations, with a very sharp improvement in the state's bottom-line at the end of last year.  

That is, after widening from about $6½bn in Q2 to around $7bn in Q3 on the delta outbreak, the seasonally adjusted general government cash deficit narrowed sharply in Q4 to about $4bn. Impressively, this broadly matches the deficit recorded in Q1 2020, back at the start of the COVID pandemic. 

The improvement in the deficit has been driven by sharply higher revenue, which spiked almost $5bn in the quarter, mainly on higher grants, although with a minor improvement in other non-tax revenue.  Payments remain high, driven by current payments, although government investment remains elevated.

History suggests that large spikes in grant revenue are not sustained, but even factoring that in it looks as if the budget is on track to come in about $2bn better than the government’s full-year forecast of a deficit of about $28bn that was published in December.  Again, further strength in the Victorian recovery could result in additional upgrades to these estimates. 

The omicron outbreak could have some effect on the Q1 result, although that should be relatively small and temporary given its impact on recent economic indicators.     

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

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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