2023-2024 Federal Budget - The Big Picture

Stronger Foundations for a Better Future
By General Manager Product & Content Pacific, Patrick Breen

The Labor Government's 2nd Budget is heavily influenced by the resilient macroeconomic conditions that have persisted longer than expected compared to October 2022. The Budget documents released on 9th May 2023 paint a picture of a government implementing its agenda while ensuring that it can continue its aim of fiscal repair. The Budget states that it aims to 'build stronger foundations for a better future' and outlines its plan to:

• Provide responsible and targeted cost-of-living relief
• Strengthen Medicare
• Broaden opportunities in our society and around the country
• Invest in a stronger and more secure economy
• Manage the budget responsibly

The Budget has a net increase in receipts from policy decisions of $22bn over the forecast period and a net increase in payments of $43bn over the same time, including the impact of $32.5bn of improvements and reprioritisations. The impact of these policy decisions is dwarfed by the changes in parameter and other variations, which will contribute an improvement of $146bn to the net cash position compared to the October 2022 Budget. The resilient near term economic conditions and changes in parameter and other variations have resulted in a $4.2bn surplus in 2022-23 (the first since 2007-08) and a significant reduction in the ongoing deficit over the near and medium term forecasts. The underlying cash balance is now expected to peak at 1.3% of GDP in 2024-26 and reduce to 0.2% by 2033-34. The Treasurer positioned this Budget and windfall as aiming 'to make Australia more resilient and more secure in uncertain times' and it has certainly helped the Government to achieve its twin policy and fiscal aims. This Budget is significantly more positive than the Budget delivered in October 2022, despite the continued macroeconomic risks. It's certainly a Budget for a Government that is laying stronger foundations for a better future.

Macroeconomic environment

This Budget has been prepared in the face of an uncertain global economic environment. Since the last Budget in October, there has been a continued strengthening of monetary policy, with an additional five interest rate rises (total of eleven) from the Reserve Bank of Australia, taking the cash rate to 3.85% from 2.6% in October 2022 (and 0.1% in April 2022). We've also seen regional bank failures in the United States driving additional global, economic stress. This stressed macroeconomic environment is common across advanced economics.

Despite the macroeconomic stress, the near term macroeconomic environment in Australia remains resilient, with unemployment remaining close to an all-time low at 3.5%, and commodity prices higher than forecast, which has helped to drive a significant increase in tax receipts of $131bn over the October 2022 Budget. These resilient macroeconomic conditions are not expected to continue, with the unemployment rate expected to peak at 4.5% in 2024-25, despite being low by historic standards. Over the same period, Real GDP growth is forecast to 1.5% in 2023-24, before rising again to 2.25% in 2024-25. This is being driven by a combination of tighter monetary policy, high inflation, and weaker global growth. There have been relatively few changes to the macroeconomic forecast for this Budget compared to October as shown in Table 1 below.

Table 1: Key macroeconomic indicators and changes since October 2022

The risks to these forecasts remain weighted to the downside, particularly in the near term. The Government calls out both global financial conditions and persistent high inflation as key risks over the forecast period. For inflation, advanced economies are recording falls in headline inflation, however, core inflation remains high and persistent at c. 6%, potentially indicating a crystallisation of the continued high inflation rate risk. near term Real GDP growth may weaken significantly with the Reserve Bank of Australia forecasting growth of 1.7% in 2022-23 (compared to 3.25% forecast in the Budget). Real GDP growth forecasts are frequently optimistic, with 75% over the last 20 years being more optimistic than outcomes, suggesting that this risk may also occur. How these downside risks play through is yet to be seen, but are likely to drive lower receipts and increase expenditure, testing the Government's focus on delivering responsible budgets that strengthen the fiscal position.

Overall fiscal strategy

Due to the near term resilience of the macroeconomic environment, the Budget is forecast to turn a surplus of $4.2bn in 2022-23 (the first since 2007-08), before returning to a continued deficit over the medium term. The deficit is forecast to peak at 1.3% in 2024-25 and 2025-26, which is an improvement of 0.7%pts compared to the October 2022 Budget. The improvement in the deficit position is primarily from increased tax receipts of $131bn driven by macroeconomic variations. This improved deficit position is expected to persist over the medium term projections falling to 0.2% in 2033-34 (-1.5%pt improvement). This is primarily driven by lower interest rate payments (-0.6%pts) and moderation in the growth of NDIS costs (-0.3%pts).

The Gross Debt is now expected to grow to $1.1tn in 2026-27, which corresponds to 36.5% of GDP, down 6.6%pts from the October 2022 Budget. Over the medium term gross debt is forecast to decline to 32.2% of GDP by 2033-34, driven by lower deficits and borrowing costs throughout the forecast period. This is a significant improvement compared to the medium term forecast in the October 2022 Budget, which has Gross Debt increasing to 46.9% of GDP in 2032-33. This improvement is in line with Government's aim to make the economy more resilient and put the Budget on a more sustainable footing.

Receipts and payment measures

The big story of this Budget is the continued increase in receipts, which are forecast to rise to $735.1bn in 2026-27 from $584.4bn in 2021-22 — an increase of $151bn. Compared to the October 2022 Budget, there has been an increase in receipts of $151bn over the forecast period of which 82% are being 'returned'. This increase is primarily driven by effect of parameter and other variations, which are worth $131bn, with policy decisions increasing receipts by $22bn over the forecast period. The parameter and other variation increase in receipts are primarily driven by increases in personal income tax receipts of $74bn due to high levels of employment and participation rates, and company tax receipts of $53bn driven by elevated commodity prices.

Payments are also forecast to rise to $763.6bn in 2026-27 from $616.3bn in 2021-22 — an increase of $147bn in payments. Compared to October 2022 Budget, this represents a net increase in payments of $26.7bn over the forecast period. This is being driven by an increase of $43bn in payments from policy decisions, being partially offset by an improvement (decrease) in parameter and other variation payments of $16bn. This decrease in parameter and other variation payments is being driven by lower debt payments, payments for the Medical Benefits programme, and Family Assistance and Support for Seniors programme being partially offset by increases in Aged Care payments and GST payments to the states. In terms of net policy changes for receipts, the net impact is $22bn, with the most significant contributions coming from:

In terms of policy changes for receipts, the net impact is $13bn, with the most significant contributions being:

• $9.0bn from tax compliance and taskforces, of which $7.6bn is from extending the GST compliance programme for another 4 years and a further $0.7bn from Tax Integrity by ensuring timely payment of tax and superannuation liabilities
• $3.3bn from increasing tobacco-exercise duties and aligning treatment of tobacco products
• $2.4bn from amending the Petroleum Resource Rent Tax
• $1.8bn from changes to superannuation including reducing tax concessions for individuals with a balance of more than $3m and increasing the payment frequency of the Superannuation Guarantee
• $1.3bn from Visas by changing visa application charges, visa durations, and work hours
• While net neutral over the forecast period, by amending the GDP adjustment factor for pay-as-you-go and GST instalments for small businesses, will result in a reduction of receipts in $1.6bn in 2023-24, being offset by an increase of the same magnitude in 2024-25

While the net changes in payments are $43bn over the forecast period, this contains $9bn of net savings with the most material savings consisting of:

• $2.2bn in Aged Care savings from reducing the provision from 78 places to 60.1 places per 1,000 people aged over 70
• $1.7bn from savings in Health and Aged Care programmes that will be reinvested elsewhere
• $1.1bn from increasing the Heavy Vehicle Road User Charge rate to 32.4 cents per litre from 27.2 cents per litre in 2023-24

The most material increases in payments, which gross $52bn are:

• $5.7bn on strengthening Medicare to provide better access and more affordable care for patients in response to the Strengthening Medicare Taskforce Report
• $4.9bn to increase support for people receiving working-age payments including JobSeeker and extending eligibility for higher JobSeeker payments those over 55s
• $3.8bn to extend the GST compliance programme for another four years
• $2.7bn to increase the maximum rate of Commonwealth Rent Assistance allowance by 15%
• $1.9bn to extend the eligibility for the Parenting Payment (Single) programme to children under 14 years old from 8 years old currently
• $1.5bn on the Energy Price Relief Plan for eligible households and SMEs
• $1.1bn to support revenue infrastructure of the Brisbane Olympic and Paralympic games
• $1.0bn on strengthening Australia's biosecurity system and ensuring it is sustainable
• $1.0bn on the visa system to reduce visa processing timelines and increase enforcement

This will overall result in an estimated increase in staffing of 11k employees to 192k in 2023-24 from 181k in 2022-23.

Overall, this Budget continues the Government's agenda of budget repair and laying stronger foundations for the future. This agenda has been strongly supported by near term macroeconomic conditions that have been more resilient than expected, enabling the Government to increase spending, while 'returning' 82% of the increase in receipts. This allows the Government to reduce the deficit and debt as a percentage of GDP over medium term forecasts. Given the increase in tax receipts, the conservative spending agenda appears reasonable and should hopefully prevent the need for difficult decisions on taxation and spending should the downside macroeconomic risks crystalise.