BILL’S BITES: How big will the budget blow-out be?

Bill Evans
11:30am October 20 2022

The new Labor government will deliver its first budget on October 25 and faces a challenging fiscal environment brought on by slowing growth and rising inflation.

The deficit will have reduced substantially since the last budget, from $80 billion to about $30bn, largely due to strong commodities prices. However, over the forecasting period, we think those savings will be gradually whittled away as weaker economic conditions kick in. 

We expect the government to forecast the deficit rising to $72bn in 2025/26, from just under $43bn in the previous administration’s pre-election economic and fiscal outlook.  

Overall, we’re not expecting any earth-shattering initiatives in the budget. Certainly, they'll deliver on their election promises around childcare, but that commitment is only about $15bn over four years, compared to the $380bn that the previous government spent during COVID, and they will find ways to pay for it.

It's also likely that the budget includes some cost of living relief measures targeted at the most vulnerable in our community. Potentially, they could be funded by scrapping some of the previous government’s programs, including some regional policy initiatives.

Conditions have deteriorated further since the Treasurer’s economic forecasts in late July, pointing to a sharper downgrade of the outlook. That will result in a higher unemployment profile and inflation staying higher for longer.

We anticipate the biggest adjustments relative to July will come for the 2023/24 year. Real GDP growth may be downgraded to 1.5 per cent, from 2 per cent, inflation lifted to 3.5 percent, from 2.75 per cent, and the unemployment rate seen at 4.25 per cent, from 4 per cent. 

Still, there’s a high degree of uncertainty around fiscal forecasts and projections, particularly around the government’s intention to review the previous government’s costing of existing programs in aged care, health care and the NDIS. 

That’s the big story I’ll be watching for: How big a blow out will the budget be in those last three years of the forecasting period, and therefore how big a fiscal challenge is this government going to set themselves into the future?

For the full report, visit WestpacIQ. 

Bill Evans

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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