The Albanese government’s midyear budget update will reveal a fiscal “sweet spot” fuelled by strong commodity prices, population growth and a resilient labour market, economists say.
But experts believe the government is likely to play down the positive budget position in order to curb calls for more cost of living relief that could stoke inflation and keep interest rates higher for longer.
The midyear economic and fiscal outlook (Myefo), due to be released on Wednesday morning, will show the government banking 92% of additional revenue over the coming four years. That proportion is up from an average 40% rate by the previous government and 30% during the Howard years, the government will say.
“By returning the majority of revenue upgrades to the budget, we’re helping to take pressure off inflation, get debt on a better trajectory and avoid billions of dollars in interest costs,” the treasurer, Jim Chalmers, said.
In the 2023-24 budget, the government forecast an underlying budget deficit for this year of $13.9bn, a figure likely to be revised lower in Wednesday’s update. Banks such as the CBA expect the eventual result will be close to a $20bn surplus, almost matching the $22.1bn surplus – the first in 15 years – recorded for the 2022-23 year.
“Commodity prices are tracking well above what was assumed, population growth has exceeded all expectations, the labour market remains resilient and the 2022-23 final bottom line was five times better than expected,” Pat Bustamante, a senior Westpac group economist, said.
“We’ve reached a budget sweet spot”, with the surplus likely to come in at about $11bn, he said.
Treasury models tend to be conservative, particularly when it comes to commodity prices. The May budget, for instance, forecast iron ore prices would retreat from $US117/tonne ($A179/t) to $US60/t ($A91/t), but instead they are hovering above $US130/t ($A197/t).
Coking and thermal coal are also trading at prices much higher than Treasury predicted, boosting royalties and corporate tax.
In the first four months of this fiscal year, total revenue is tracking $8.4bn higher than expected, while payments are tracking $0.8bn lower, according to Westpac.
Chris Richardson, an ex-Treasury economist and now independent commentator, said the government had “every incentive to calm the horses with respect to the amount of dollars they have”.
“It helps keep fellow ministers in line and it helps keep the punters in line,” he said. “It’s a very difficult explanation to say to families, ‘We’ve got money and you haven’t, and tough luck, we’re not helping.’”
The higher than expected inflation rate has been a boon for budget revenues through the tax bracket creep, something the government has been tight-lipped about. A swelling workforce, though, has also helped and Chalmers will spruik that outcome.
“We know people are still under pressure but inflation is moderating, wages are growing and unemployment is low,” Chalmers said.
The government estimates labour market upgrades account for about a third of the budget’s revenue upgrade over the four years to 2026-27. The economy has added more than 620,000 jobs since the May 2022 election, the most for a first-term government, Chalmers’ office has said.
The Australian Bureau of Statistics is due to release labour market details for November, which may add to the employment tally.
Economists expect the economy added a net 12,000 jobs last month, not enough to stop the jobless rate edging higher from 3.7% in October to 3.8%. The range includes the ANZ forecasting the economy lost 30,000 jobs last month, while the CBA expects a 15,000-job gain.
Chalmers has already revealed a few details of the budget update, including a projection that rising borrowing costs will add $80bn to expenditure over the 11 years to 2033-34.
The jump in interest payments, averaging 11.7% a year over the next decade, will exceed the 10.1% pace for the NDIS, 6.5% for hospitals and 6.3% for defence, Myefo will show.
Richardson said that projection may prove too pessimistic, since bond rates have since retreated to about 4.3%.
Richardson said the budget update would “essentially be a tug-of-war between the good news from things like iron ore prices and bad news from things like the cost of the NDIS”.
“The difference is the good news will ultimately be temporary and the bad news will tend to hang around”, affecting future budgets, he said.
