What saved the budget? – Macro Business
Westpac with the note. In a nutshell: commodity prices and the reopening boom.
The federal budget position has improved significantly in fiscal year 2021/22, exceeding all expectations.
The underlying cash deficit stood at -$32.0 billion, or -1.4% of GDP. This was $47.9 billion less than projected in the March 2022/23 budget.
The deficit has narrowed sharply from the record deficit in 2020/21, at the start of the pandemic, of -$134.2 billion, -6.5% of GDP.
Revenue for 2021/22 was $27.7 billion higher than forecast. Payments were $20.1 billion lower than forecast.
Net debt in June 2022 was $515.6 billion, or 22.5% of GDP, some $115.8 billion lower than budgeted. Net debt peaked in 2020/21, at $592.2 billion, 28.6% of GDP – down from $76.6 billion in 2021/22.
Gross debt in June 2022 was $895.3 billion, or 39.0% of GDP, a surprise downside of $10.7 billion. As a percentage of the economy, gross debt fell by 0.5% of GDP, from a peak of 39.5% in 2020/21.
Australia’s economy grew at a rapid pace in 2021/22, with nominal GDP growing at 11.0%, a fraction above the 10.75% forecast in the budget.
While the budget forecast for the economy was broadly correct, the budget figures – receipts and payments – diverged significantly from the official forecast, as shown above.
Double-digit nominal GDP growth was well above normal, a result significantly boosted by the rise in the terms of trade to a record high, up 12.1% on the year, due to the rise world commodity prices.
Another factor has been relatively high inflation more generally.
The mining sector was one of the main beneficiaries, with mining profits up 46% during the year.
Production increased by 3.9% in 2021/22, a fraction below the budget forecast of 4.25%. This strong result was supported by earlier policy stimulus and the gradual easing of covid-related restrictions.
Labor market conditions were generally more favorable than projected in the budget. Employment grew 3.3% in the year to the June quarter of 2022, beating forecasts of 2.75%. Wages, as measured by the wage price index, rose 2.6% on the year to June, in line with the budget forecast of 2.75%. Total employee compensation increased by 5.6% in fiscal year 2021/22.
Revenues for the year 2021/22 amounted to $584.4 billion, or 25.4% of GDP.
This included $536.6 billion in tax revenue, 23.4% of GDP, a surprise upside of $24.1 billion. The good surprises were concentrated on corporate income tax, +14.2 billion dollars, and on individuals, +6.8 billion dollars. Lower-than-expected use of COVID-19-related business support measures, such as temporary comprehensive spending and loss carry-back, was a contributing factor to higher-than-expected corporate tax revenues.
Non-tax revenues totaled $47.8 billion, some $3.6 billion more than expected.
For more details on tax revenues, in terms of fiscal year, they amounted to $550.4 billion for 2021/22. This represents a 14.6% increase from a year ago, +$70.2 billion.
Personal income tax was $264.6 billion, accounting for 63% of total tax revenue. This result was up 12.3% from a year ago, an increase of $28.9 billion.
As for corporate profits, they were $125.9 billion for the year, or 30% of the total. That was a 27% increase over the previous year, an increase of $26.8 billion.
Details of expenses
Payments were $616.3 billion in 2021/22, 26.8% of GDP, a surprise downside of $20.1 billion.
The FBO document cites a number of factors impacting specific programs, which together accounted for $11.1 billion in lower-than-expected payouts, or 55% of the downside surprise.
The budget document quotes:
* “programs providing funds in response to COVID-19 have experienced delays or lower demand than estimated;
* health-related programs experienced lower than estimated demand;
* several programs were also impacted by supply chain disruptions and capacity constraints, resulting in payments below estimates or late payments;
* other programs also experienced lower participation than estimated; and
* the result also reflects the increase in payments in certain programs”.
We note that the stronger-than-expected labor market will have put downward pressure on social benefits, likely contributing to lower-than-expected payouts. Unemployment fell to 3.75% in the June quarter, below the budget forecast of 4%, and job growth was significantly stronger (3.3% vs. 2.75% expected).
Containment and reopening: dramatic budgetary impact
Conditions have been volatile for the past couple of years with covid restrictions at times disrupting business significantly.
This was evident in the 2021/22 financial year, with the early months impacted by delta blockages in the two largest states, NSW and Victoria.
The transition from lockdown to reopening had a dramatic impact on budget numbers in 2021/22 – the $32.0 billion full-year shortfall reflected two very different periods.
In the first four months of 2021/22, from July to October, the cumulative budget deficit stood at $43.9 billion.
Over the eight months from November to June 2022, benefiting from the reopening, the budget went into surplus, amounting to a cumulative 12.0 billion dollars.
Between the two periods, the monthly rate of receipts jumped by 29% ($40.7 billion to $52.7 billion), while payments stabilized, down -1% ($51.7 billion to $51.2 billion).
Recall that in 2018/19, before the pandemic, the budget was in balance.
An uncertain prospect
Where from here remains very uncertain.
A sharp downturn in the Australian economy is imminent in response to an aggressive RBA tightening cycle. Additionally, global commodity prices have retreated from their highs due to fears of a global recession.
The upcoming October 25 federal budget – the initial budget of the newly elected government – will provide an update to official forecasts, both economic and fiscal.
Today, Federal Treasurer Chalmers reportedly said, ‘don’t expect to see a budget surplus in the years to come’, adding that ‘fiscal pressures are intensifying rather than diminishing’.
In earlier comments, at a joint press conference with the Minister of Finance on September 20, Treasurer Chalmers highlighted “the five major areas of growing spending in the budget, which are creating some pretty significant structural issues. Health, the NDIS, elder care, defense, and the cost of servicing a trillion dollar debt are all rising rapidly. And it’s a combination of the inevitable and the desirable, and so we need to have a conversation about it.