Budget update shows Australia in good shape

SYDNEY: Australia’s budget update shows the government’s books are in better shape than anticipated due to persistent strength in commodity prices and a tight labour market, though global risks are clouding the outlook.

The deficit is forecast at A$1.1bil (US$722mil) in the 12 months through June 2024, or 0% of gross domestic product (GDP).

This is a significant improvement from the May budget’s estimated A$13.9bil shortfall, the mid-year economic and financial outlook released by Treasurer Jim Chalmers and Finance Minister Katy Gallagher showed yesterday.

The improvement extends into the financial year 2025 with the shortfall seen at A$18.8bil, or 0.7% of GDP, almost half the May forecast.

The following year is closer to earlier estimates at just 0.1 percentage point of GDP better than the budget.

Australia’s centre-left Labour government is trying to bolster its credentials in managing the nation’s finances and overcome perceptions that the conservative opposition is a superior economic manager.

Chalmers delivered the first budget surplus in 15 years in 2022 to 2023 and the government is now trying to arrest a decline in its approval rating amid elevated inflation and rising interest rates.

“The economy is expected to regain momentum in 2024 to 2025 as inflation subsides and growth in household disposable incomes improves,” the update showed. “With inflation moderating, positive annual real wage growth is expected to return in early 2024 and will support real household disposable incomes.”

The government is due to hold an election by the middle of 2025.

The budget update showed a lower debt profile through the forecast horizon. As a share of GDP, gross debt is now estimated to peak 1.1 percentage points below the May forecast at 35.4% of GDP in 2027-28.

“The significant budget improvement is the result of the government’s financial restraints,” the update showed.

“The government continues the task of budget repair from the last two budgets.”

The government warned that interest payments will rise in the medium-term, reflecting the Reserve Bank of Australia’s (RBA) 4.25 percentage points of monetary tightening since May 2022.

Last week, the central bank left its benchmark rate at a 12-year high while signalling that further hikes may be needed to tame prices.

The RBA will welcome the update that shows the government is working to consolidate its books to help align fiscal and monetary settings.

Even so, S&P Global Ratings last week described as “relaxed” the approach of Australia’s various levels of government to financial consolidation, warning it is likely dulling the effectiveness of the RBA’s policy tightening.

The government’s forecasts showed headline inflation will slow to 2.75% by the middle of 2025, a more optimistic assessment than the RBA’s estimates released last month that had CPI only easing to the top of its 2% to 3% target by the end of 2025.

That is partly explained by the jobless rate which is seen peaking at 4.5% in the financial 2025, slightly higher than than the central bank’s 4.25% estimate.

Australia’s employment growth has been powerful, with the update highlighting that the jobless rate, currently at 3.7%, has “seen the longest consecutive run below 4% since monthly records began”.

Yet the report also sounded a warning about the international backdrop against which the forecasts were compiled.

“Russia’s invasion of Ukraine, the Hamas-Israel conflict, the ongoing adjustment in China’s property sector and the lagged effects of sharp global monetary tightening all pose downside risks,” it said. — Bloomberg