Budget 2022-23: The economy

This is a safe, ballot box friendly Budget as expected with a focus on jobs, cost of living, home ownership, and health.

Australia’s unemployment rate is at 4%: the lowest rate in 48 years.

Amid the ongoing COVID 19 pandemic and natural disasters, the Australian economy has outperformed all major advanced economies, experiencing a stronger recovery in output and employment from pre pandemic levels. The recovery is expected to continue with the unemployment rate forecast to reach 3.75% in the September quarter of 2022, nearly 3% below the forecast 2 years ago.

The Wage Price Index (WPI) is forecast to increase from 2.75% through the year to the June quarter of 2022 to 3.25% through the year to the June quarter of 2023. But, there is “significant uncertainty around the pace at which wages growth will accelerate.”

Real GDP is forecast to grow by 4.25% in 2021 22. And, by 3.5% in 2022 23 and 2.5% per cent in 2023 24.

The deficit for 2022‑23 is expected to be $78 billion or 3.4% of GDP.

Since the Mid Year Economic and Fiscal Outlook (MYEFO), the underlying cash balance has improved by $103.6 billion over the 5 years to 2025-26. The Budget shows the deficit more than halving to 1.6% of GDP by 2025-26 before falling to 0.7% of GDP by the end of the medium term. Gross debt as a share of the economy is expected to peak at 44.9% of GDP at 30 June 2025, 5.4% lower and 4 years earlier than projected at MYEFO. Gross debt is projected to fall to 40.3% of GDP by the end of the medium term, 9.6% or $236 billion lower than at the end of the medium term in MYEFO.

The Budget projects a halving in the deficit to 1.6% of GDP by 2025‑26 before falling to 0.7% of GDP by the end of the medium term.

Commodity prices are near record high levels, in part due to the Russian invasion of Ukraine. Metallurgical and thermal coal spot prices have recently reached highs that are 62% and 53% above previous peaks.

Inflation is expected to rise to 4.25% through the year to the June quarter of 2022. This reflects higher global oil prices and ongoing supply chain pressures as well as price pressures in the housing construction sector. Then moderate to 3% in 2022 23 and 2.75% in 2023 24.

The recent floods in Queensland and New South Wales have had a devastating impact on many communities. The Government expects to spend over $6 billion in total on disaster relief and recovery (in addition to the $3.6 billion already allocated to households, businesses and communities).

On COVID-19, the Budget assumes:

• Community transmission of COVID 19 will continue to occur.
• A further Omicron wave is assumed to occur over winter 2022, which may again see elevated rates of absenteeism and pressure on supply chains.
• Beyond winter, it is assumed that Australia will continue to experience intermittent, localised waves of Omicron, or other new COVID 19 variants. However, it is assumed that high vaccination rates and improved medical treatments, together with continued community adaptation to COVID 19, will see the economic impact of future outbreaks continue to moderate. Box 2.4 considers a scenario where a new COVID 19 variant of concern poses greater downside risks to the economic forecasts.
• It is assumed that public health measures such as physical distancing and density restrictions are phased down, but reimposed in a targeted way in response to future COVID 19 outbreaks. These public health measures are not expected to materially affect the economic forecasts.
• Australia’s international borders are assumed to be open to migrants and fully vaccinated tourists.

Expenditure: How the 2022-23 Budget will be spent

As the Government’s response to the COVID-19 pandemic reduces, expenses decrease from $640 billion in 2021-22 to $628 billion in 2022-23 – an impact that is primarily reflected in the health, social security and welfare, and other economic affairs functions. Expenses are expected to reach $687 billion in 2025-26. While, low unemployment and increased economic growth has reduced expenditure on income support programs, higher inflation and wages growth forecasts have impacted indexation rates and led to increased expenditure estimates on government payments to individuals.