Federal Budget 2023-24 Preview

Surplus is a happy budget beginning; beware the ending

From the Chief Economist

On Tuesday evening, bracket creep, more migrants and the deliberate under-forecasting of commodity prices will have worked their fiscal magic and likely turned the Government’s refreshed underlying cash balance estimate for 2022-23 into a surplus.

If the Government resisted pressure to give this away by allocating it to new purposes, the underlying cash balances for the coming four years would also look better than they did at the October Budget. Net debt and interest costs will also take a step down, despite higher interest rates.

But because the improvement comes from an unexpectedly strong labour market, higher wages, more migration than anticipated and Treasury’s continued practice of under-estimating commodity price forecasts, it doesn’t fix the structural deficit.

This is a problem that stems from government spending being set as close as possible to total revenue, while Government tolerates unexpected demand driving upward spending too.

Continually managing toward the upper-bound of total revenue is missing the opportunity to move the budget into structural balance. Restoring balance is crucial to ensure the Government can cushion the economy from future shocks, flexibly manage our way towards net zero emissions and other worthy policy goals – while not leaving the next generation to pay off their parent’s debt.

To move the budget into structural balance, the Government must do three things:

1. Not add to spending, without at least offsetting it elsewhere
2. Change existing policy to lower spending and find new revenue that will persist over time
3. Put in place policies to assist the private sector to maximise its productivity.

The Treasurer has promised to bank ‘most of the revenue windfall’. But in reality, he needs to bank all of it and make tough decisions about existing policy to put Australia’s Federal Budget back on track.