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.     


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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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