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From the Chief Economist
Despite Australia’s economy slowing, the Commonwealth’s revenue projections have been revised up by a whopping $64 billion over four years, as strong jobs and population growth, unindexed personal income tax brackets and strong company tax collections (especially from ongoing high commodity prices) push up taxes.
As in the past two Budgets, the Government has chosen to use most of the projected improvement to lower its forecasts for the upcoming underlying cash deficits and the debt profile.
The Government also extended some infrastructure project funding over a longer period – though it has put more money into others in the near-term to meet inflated construction costs. The overall impact on total infrastructure spending over the next four years was minimal.
The improved bottom line is substantial. Just two years ago, when the 2021-22 mid-year budget was published and COVID-19 measures were still needed, it was inconceivable that the $85 billion deficit projection for the current financial year would effectively ‘disappear’ – especially given the economic forecasts were much stronger then.
Download our Mid-Year Economic and Fiscal Outlook analysis
But as the budget has improved, inflation has worsened – and this is the ongoing battle the Government is fighting, along with the Reserve Bank of Australia.
In this fight, more could have been done by being tougher in cutting measures that would have improved the bottom line beyond those offered up by the higher windfalls. This is politically difficult, but, as we argued when the 2022-23 and 2023-24 Budgets were released, they would have made the Reserve Bank’s job easier – and spared mortgaged households some pain.
State governments are proving to be prolific spenders. As the Commonwealth was releasing its Budget update, so too was the Queensland Government. Its infrastructure profile was increased by a substantial $7 billion over four years. Not helpful in the fight against inflation. Commonwealth and state spending is equally as potent in bidding up prices in the economy.
With the economy expected to grow by only 1.75 per cent in 2023-24, the Government’s window to pull back spending and assist the Reserve Bank is limited. Delays in tough spending decisions mean they could land at the wrong time.
Summary
We give the Government some credit for being more inflation aware in this Budget update – but we encourage it to go further in May, especially with Stage 3 tax cuts planned for July 1.