The Budget flagged some fairly bracing economic expectations:
  • Inflation is expected to peak at 7.75% in the December quarter and will persist at higher rates for longer than anticipated before easing to 3.5% by June 2024.
  • Real GDP is forecast to grow to 3.25% in 2022-23, then retract to 1.5% in 2023-24.
  • Electricity prices are expected to increase nationally by an average of 20% in late 2022, with retail electricity prices expected to rise by a further 30% in 2023-24.
  • The deficit sits at $36.9bn. While this is better than initially estimated, the deficit will expand to $49.5bn by 2025-26.
  • Tight labour market conditions are expected to see annual wage growth rise to 3.75% by June 2023.
  • Even so, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24. Your wages might increase, but the gains will be eaten away by the increasing cost of living.
Economic success → Collect more taxes.

The Labor Government has enjoyed the benefits of some of the economic success of Australia, having collected more taxes, more GST and more revenue from the increased activity from the mining sector, plus the lower unemployment rate:

  • more people that are employed means
  • more people are earning income which in turn means
  • more people are paying tax

The increase in wage rates that the Government announced in June and passed in July has had an inflationary effect, which has meant more income for many Australians, and again, moving people into the net tax bracket, meaning more tax again.

So, all in all, the Government has been the beneficiary of the increase in taxes, which has meant a lower deficit.

Balancing act.

The Government appears keenly aware of the economic balancing act taking place, keeping the budget predominantly to election promises and redirecting existing initiatives to avoid exacerbating inflationary pressures. As the Treasurer said, “Australians know this is a time of great challenge and change.”

In more detail, the global economic environment has sharply deteriorated. Inflation has risen rapidly across advanced economies. The Russian invasion of Ukraine has significantly driven up global energy costs and exacerbated the impact of poor weather on global food prices. All of this impacts Australia. Here are the highlights:

Real GDP is forecast to grow by 3¼ per cent in 2022-23 before slowing to 1½ per cent in 2023-24, as cost of living pressures and rising interest rates increasingly weigh on household disposable income and consumption.

The Government warned that with the highly uncertain global economic outlook, significant risks could cause a sharper slowdown in domestic activity. Globally, key hazards include a ‘hard landing’ or recession across major advanced economies, a sharper-than-expected downturn in China due to COVID-19 outbreaks and the property market downturn, a sudden tightening in financial market conditions and further energy price shocks stemming from the Russian invasion of Ukraine, which could drive inflation even higher.

And domestically, the full impact of recent floods is highly uncertain as the situation continues to develop.

Forecast to peak at 7¾ per cent in the December quarter of 2022. Supply disruptions have resulted in significant price increases in home building, fuel and energy. Food prices remain elevated and have been further exacerbated by recent floods. Some of these pressures are expected to persist into 2023. Inflation is expected to remain elevated at 5¾ per cent over 2022-23 and 3½ per cent over 2023–24 before gradually easing and returning to within the Reserve Bank’s inflation target by 2024-25.

Lower the originally estimated at $36.9bn. However, the deficit is expected to climb to over $51bn by 2024-25 with the impact of higher inflation on indexed payments for services, the NDIS in particular.

This is close to one trillion dollars and is at the highest level as a share of GDP in over 70 years.

Revised up by $54.4bn in 2022-23 and $142.0 billion over the 4 years to 2025-26.

Labour market conditions are expected to remain tight.

The unemployment rate is forecast to rise to 4½ per cent by the June quarter of 2024.

Tight labour market conditions are expected to see annual wage growth pick up to 3¾ per cent by June 2023. However, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24.

Electricity and gas prices are expected to rise sharply over the next 2 years, as the cost of energy market disruptions are passed through to households. Treasury has assumed retail electricity prices will increase by an average of 20% nationally in late 2022. Retail electricity prices are expected to rise by a further 30% in 2023-24.

 

Domestic gas prices remain more than double their average prior to Russia’s invasion of Ukraine. Retail prices are expected to increase by up to 20% in 2022-23 and 2023-24.

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