The federal budget next Tuesday night has become even more interesting following the Reserve Bank’s decision to increase interest rates this week.
Certainly, Governor Lowe and his team will be watching closely for any implications for the inflation and interest rate outlook.
We expect the budget bottom line to have improved by around $110 billion over the four-year forecast period compared to October’s estimates, potentially getting it close to a surplus in 2022/2023.
This year’s deficit was estimated at around $37 billion in October, and we think it'll now only be about $7 billion.
Reasons for the big improvement include higher inflation in the economy, the strong labour market, and price assumptions for iron ore – Australia’s top export earner.
Back in October, the budget assumed the ore price would be $55 per ton by March 2023. In fact, it's still trading close to $120, and we think next week’s update will push that $55 assumption out to the end of 2024.
So, the Treasurer has a lot of money to spend. What areas is he likely to target?
We expect there'll be relief for households, both in regard to rents and energy costs, and on medical prescriptions. We could also see encouragement for green investment, small business and a range of other initiatives that will start to leak out over the next few days.
On the tax front, we expect there'll be more money raised from multinationals and we’re likely to see an increase in taxes for gas companies.
The key question is: what is a reasonable amount of money to spend, without putting upward pressure on inflation and interest rates?
Looking back through previous budgets over the past decade, new spending in the first year is generally around 0.25 per cent of GDP. That’s around $6-7 billion in today’s numbers. Over three years, it’s about 0.5 per cent of GDP, or $13-$14 billion. So we’ll be watching it through that lens.
The numbers are likely to be bigger on budget night, but we also think that the Treasurer will show a fair amount of discipline.