Economy on the boil gives Frydenberg a hefty war chest for next week’s Budget

A stronger-than-expected economy, a falling unemployment rate to historic lows and a commodity price boom as the result of the Russia-Ukraine war has the revenue dollars rolling in for Josh Frydenberg’s fourth budget.

Mar 24, 2022, updated Mar 24, 2022
Treasurer Josh Frydenberg will have a handy election war chest when he unveils the Federal Budget next week. (AAP Image/Mick Tsikas)

Treasurer Josh Frydenberg will have a handy election war chest when he unveils the Federal Budget next week. (AAP Image/Mick Tsikas)

The treasurer will present the budget on Tuesday, and just days out from Prime Minister Scott Morrison calling what is expected to be a difficult federal election for his government, if opinion polls are to be believed.

Economists expect the budget to show a much-improved bottom line, alongside major forecast upgrades for growth, wages and inflation, and an unemployment rate that is projected to be well entrenched below four per cent.

Frydenberg believes the Australian economy has real momentum and full employment is in sight, with the first phase of his fiscal strategy to tackle the Covid-19 pandemic having delivered on its objective.

“With our recovery well under way it is now time to move to the next phase of our fiscal strategy,” the treasurer told the Australian Chamber of Commerce and Industry in a pre-budget speech.

“This will see a focus on stabilising and then reducing debt as a share of the economy. Rebuilding our fiscal buffers without risking growth.”

But there will be pre-election budget sweeteners.

Both the treasurer and Morrison have promised a support package for households in the face escalating cost-of-living pressures, among an avalanche of other budget measures revealed in the past few weeks.

Deloitte Access Economics economist Chris Richardson doubts the government will spend all of the windfall, which he estimates is around $88 billion over four years.

“A chunk of it will go to the bottom line, so debt will improve,” he told AAP.

Commonwealth Bank head of Australian economics Gareth Aird agrees that while there will be sweeteners, there is no compelling economic case to ease fiscal settings in any material sense.

“Any such policies should be small in size and scale given the domestic economy is currently running red hot and the labour market is very tight,” Aird says.

Economists are expecting an underlying budget deficit of between $80 billion and $70 billion for the 2021/22 financial year compared with the $99.2 billion shortfall predicted in December’s mid-year review and the $106.6 billion at the time of last year’s May budget.

InQueensland in your inbox. The best local news every workday at lunch time.
By signing up, you agree to our User Agreement andPrivacy Policy & Cookie Statement. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

The budget deficit was already shrinking prior to the global spike in commodity prices caused by the Ukraine conflict.

As of January the underlying budget deficit stood at $52.2 billion, $13.2 billion smaller than had been forecast after seven months of the financial year.

For the 2022/23 financial year deficit forecasts range from around $80 billion to $55 billion compared to the $98.9 billion in the mid-year review.

Westpac chief economist Bill Evans expects the budget will stick with an economic growth forecast of 3.75 per cent for this financial year, but upgrade growth to 4.25 per cent for 2022/23 from a previous 3.50 per cent.

Like the Reserve Bank of Australia, unemployment rate forecasts are expected to be cut to 3.75 per cent from 2022/23 onwards, having already hit four per cent in February – a 14-year low.

Levels below four per cent have not been seen since 1974.

Likewise, predictions of three per cent wages growth and above are likely to be brought forward a year, starting in 2022/23 due to a tightening labour market.

“Currently, supply shocks are leading to increases in consumer prices, pointing to a material upgrade to the inflation forecast for 2021/22 to 4.25 per cent from 2.75 per cent,” Mr Evans said.

But he expects inflation will settle at 2.5 per cent thereafter, as projected in the mid-year review.

Local News Matters
Copyright © 2024 InQueensland.
All rights reserved.
Privacy Policy