The federal budget will benefit from an upswing in revenue due to “cyclical serendipity” but “storm clouds” are gathering, as the International Monetary Fund warns a third of the global economy could contract this year or next.
Deloitte Access Economics predicts the budget’s cash deficit will widen to $60.7bn for 2022-23 from $32bn last year. However, $114.4bn in more revenue for the next four years than was predicted in the final Coalition budget last March will see that deficit narrow each year to $35.7bn by 2025-26.
Deloitte’s forecasts are based on new economic predictions and policy announcements by the Albanese government before and after it won office in May. The consultancy expects Australia will avoid a recession even as GDP growth slows and inflation rises.
“Australia is in a slightly odd position,” Stephen Smith, an economics partner at Deloitte, told Guardian Australia. “We’re both the envy of the world and not in a particularly good position at the same time.”
The budget’s bottom line has improved largely because of surging commodity prices and a low jobless rate at about 3.5%. Inflation peaking at 7.3% for the year to December and rising wages will also buoy revenues more than expected.
“It hasn’t taken any hard work from governments of either major party,” Deloitte’s budget monitor report said. “Indeed, the upswing in revenue that has landed in the federal budget’s lap is entirely the result of cyclical serendipity – a clear example of passive budget repair.”
Even though commodity prices had started to retreat from record highs, they should continue to boost company taxes over the four years. All up, firms would pay $80.6bn more than anticipated in March, Smith said.
Individuals would chip in about $17bn more than expected, while GST would rise by $4.1bn and additional excise would add $5.3bn to revenues over those four years, he said.
The extra revenue would “overwhelm” higher spending on wages and elevated benefits payments that were indexed to inflation or wages, Smith said. Based on commitments made so far, federal outlays would be $68.9bn higher over the four years than forecast by the government in March.
The budget projections assume that the stage-three tax cuts will remain unchanged even though there have been signs lately that the prime minister, Anthony Albanese, and the treasurer, Jim Chalmers “may be starting to wobble on a clear election commitment”, the report said. The tax cuts’ expected revenue impact of $243bn over nine years “may now be an underestimate given the expected pace of wage gains, particularly in the short term”.
“It’ll be a relatively boring budget,” Smith said. “This is the budget the government needs to get through [before] laying down plans for more significant changes.”
Some of those changes may be forced on Australia. The IMF warned in its latest World Economic Outlook that “as storm clouds gather, policymakers needed to keep a steady hand”.
The IMF left its global growth forecast for 2022 unchanged from its July prediction at 3.2%, but trimmed its 2023 estimate by 0.2 percentage points to 2.7% growth.
“More than a third of the global economy will contract this year or next, while the three largest economies – the United States, the European Union and China – will continue to stall,” the IMF report said. “In short, the worst is yet to come, and for many people 2023 will feel like a recession.”
“The IMF has today warned the global economy is headed for turbulent and uncertain waters – with many economies at risk of slipping into recession, risks of further energy and food price shocks, and debt distress hitting emerging markets,” Chalmers said.
“It is clear that there is no easy path ahead – that’s why the October budget will build resilience by delivering responsible cost-of-living relief, invest in our people and our economy, and begin the hard yards of budget repair.”
The IMF said increasing price pressures remained “the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability”, and urged central banks to stay firm in their efforts to contain inflation.
It predicted Australia’s GDP would grow 3.8% in 2022 and slow further to 1.9% next year. Inflation would end the year at 6.5% before easing to 4.8% next year. The jobless rate – already near five-decade low levels of 3.5% – would only rise modestly to 3.6% by year’s end and to 3.7% in 2023.
“These challenges do not imply that a large downturn is inevitable,” the IMF said. “In many countries, including the United States, the United Kingdom and the euro area, labour markets remain tight, with historically low unemployment rates and high levels of vacancies.”
