Economists warn federal budget shows cracks

Federal Treasurer Jim Chalmers MP handed down the Australian Labor Party’s 2023–24 budget, on Tuesday (9 May) evening , which seeks to “strike a considered, methodical balance” between spending restraint to keep the pressure off inflation, while boosting support for the most vulnerable.

The budget built on the Albanese government’s first budget released just six months ago and centred around a $14 billion cost-of-living package to create more affordable housing, a boost to wages, and lower power bills.

Alongside the cost-of-living measures, the budget has thrown $3 billion into energy relief, $3.5 billion on Medicare bulk billing incentives, $4.9 billion towards increasing Jobseeker for all, and a lifting of Rent Assistance by 15 per cent.

In addition, it was the first budget in 15 years to deliver a moderate surplus, of $4.2 billion, on the back of tighter spending and $17.8 billion in savings, Mr Chalmers noted.

The economic windfall was driven by strong employment and better-than-expected nominal wage growth as well as very high commodity prices, NAB’s chief economist Alan Oster said.

However, the budget boost is expected to be short-lived, with a slowing economy expected to drag the budget back into the red.

The surplus turns back to a deficit of around $35 billion as “the impact of cyclical factors fade and a persistent — albeit improving — structural deficit continues”, Mr Oster said.

“…The structural deficit, which is what really matters in terms of where you’re at, really doesn’t change,” he said at NAB’s post-budget briefing.

“So, [we’ve] got deficits forever, if I can put it that way, because the structure of the economy [isn’t] addressed in the long term.”

Optimistic GDP outlook

The government expects GDP to grow below trend over each of the next two years at 1.5 per cent (2023–24) and 2.25 per cent (2024–25), similar to the previous budget’s expectations.

The NAB’s economist, alongside Westpac’s economists, noted the economic outlook was slightly more optimistic than their forecasts, with NAB’s view coming in around 0.75 ppt stronger than the government’s GDP forecasts.

“The big shift in 2022–23 (from 2021–22) is a fall in expenses back to around its pre-COVID-19 level, with revenue broadly unchanged,” Mr Oster said.

“We’re sort of saying, at the back end of this year, the economy is going to get very close to [stalling].

“Now, we’re not saying it’s a recession, but for some people, it’s going to feel recessionary [and] it’s not going to be great.”

Likewise, the budget’s growth forecasts were “firmer” than Westpac’s 0.9 per cent forecast for 2023–24 and 1.7 per cent for 2024–25, with the main risks being around a “more persistent period of high inflation”.

“The 2023–24 budget points to a challenging path ahead for the economy with high inflation and an associated sharp rise in interest rates impacting both locally and abroad, and the balance of risks firmly tilted to the downside,” Westpac economist Bill Evans said.

He said the downside risks relate to the potential for a more significant labour market downturn and the possibility of a “hard landing” by aggressive tightening of monetary policy.

Fiscal stimulus may, however, push back the time frame for rate cuts, as disposable incomes increase, which Westpac currently projects will commence in February 2024.

“But it could mean that over the course of that year, the opportunity to cut rates as early as February starts to fade away. That’s the one thing I’m worried about with regard to the budget,” Mr Evans said.

Persistent inflation

The budget was heavily weighed down by concerns over persistent inflation that lingered at 7 per cent in the March 2023 quarter and the corresponding aggressive monetary tightening cycle.

The federal Treasurer has warned: “In this environment, inflation remains our primary economic challenge” given it drives rate rises and erodes real wages.

“Which is why this budget is carefully calibrated to alleviate inflationary pressures, not add to them.

“Our policies to ease the pressure on households will take ¾ of a percentage point off inflation in 2023–24, which is expected to fall from 6 per cent this year to 3 ¼ per cent next year,” before returning to the RBA’s target band in 2024–25.”

Despite the slowing down, the federal Treasurer has said the “economy will continue to create jobs”.

ANZ’s senior economist Adelaide Timbrell warned the policy focus may change from inflation to unemployment, as the budget showed inflation moderating while unemployment remained at historically low levels.

Unemployment is expected to remain low by historical standards — 4 ¼ per cent in 2023–24 and 4 ½ the year after.

Ms Timbrell noted while the unemployment rate remains low, the expected increase “could become a focus of future policy and budgets”.

The economic forecasts were slightly “more conservative” than ANZ’s economists as well as AMPs economists, with ANZ estimating GDP growth in 2023–23 at 2.6 per cent and AMP forecasting 2.5 per cent.

“A conservative approach seems appropriate, given the very uncertain economic outlook,” Ms Timbrell noted.

Given persistent inflation figures, ANZ expects another 25-bp rate rise in August, taking the cash rate to a peak of 4.1 per cent, which is contrary to the RBA's forecasts, which indicate the peak was 3.85 per cent. 

Rate impact

AMP chief economist Shane Oliver said the budget impact on interest rates would be neutral, given it was largely disinflationary with government spending constrained.

But the stimulatory effects of the Albanese government’s $14.6 billion cost-of-living package would be watched closely by the RBA.

“With the budget overall taking more out of the economy than it’s putting back in compared to what was projected last October, it’s hard to see significant implications for the RBA but it will be wary of the boost to households from the cost-of-living measures which could boost spending,” he said.

Meanwhile, in its post-budget analysis, the Commonwealth Bank retained its rate outlook, calling an end to the tightening cycle with a terminal cash rate of 3.85 per cent.

CBA has claimed rate relief is on the cards this year, with the bank projecting cuts before the close of 2023.

“CBA Group economists expect that the RBA ended its hiking cycle in May with the potential for rate cuts in the December quarter, necessitated by a sharp slowing in economic growth after rapid rate hikes. The potential policy pivot and easing of rates could yet support shares into year end,” the bank noted.

[Related: Budget slammed for not addressing the housing crisis]