Budget Review 2022–23 Index
Dinty Mather
The purpose of the macroeconomic outlook in Budget
strategy and outlook: budget paper no. 1 2022–23 Statement 2 is to
present the economic forecasts completed by the Australian Government Treasury (Treasury).
These forecasts underlie the Australian Government Budget and are used to assist
in calculating budget year outcomes and projections of government revenue and
expenses over the forward estimates (the fiscal outcome).
Major economic parameters for domestic
economy
Because macroeconomic conditions have improved since the 2021–22
Budget and the Mid-Year
Economic and Fiscal Outlook 2021–22 (MYEFO 2021–22), the Australian Government
forecasts for key domestic macroeconomic parameters have been revised upwards, as
illustrated in Figure 1 below. The revisions are broadly driven by a stronger
than expected momentum in labour markets and consumer spending which are
expected to offset the COVID-19 pandemic disruptions and other shocks like the recent floods
in Queensland and New South Wales, and the Russian invasion of Ukraine.
Figure 1 Forecast and
projected key economic parameters for the 2022–23 Budget, 2021–22 MYEFO and
2021–22 Budget
Sources: Australian Government, Budget
strategy and outlook: budget paper no. 1: 2021–22, p. 9; Australian
Government, Mid-Year Economic and
Fiscal Outlook 2021–22, p. 17; Australian Government, Budget
strategy and outlook: budget paper no. 1: 2022–23, p. 6.
The major trends in the macroeconomic parameters are due to
the following expectations:
-
GDP growth recovered after initial COVID-19 lockdown measures and
is expected to continue growing, however considerable risks remain where
continued growth will rely on the effective management of any future COVID-19 outbreaks.
-
Forecast GDP growth is expected to drive employment growth and
further declines in unemployment.
-
Moderate wage growth is forecast in response to the impacts of
the pandemic, continued spare capacity in the labour market, and low wage
increases in new federal enterprise bargaining agreements and state public
sector wage caps.
-
Key commodity prices, particularly iron ore, improved Australia’s
terms of trade and supported mining industry profitability which will flow
through into nominal GDP and sustained tax receipts for 2022.
-
Australian growth is not expected to be hampered by the
international economy as most of its major trading partners have also
experienced a rebound in economic activity after the initial COVID-19
disruptions, but again considerable risks remain with the possibility of
further outbreaks.
Modelling results in Budget paper
no.1 2021–22, MYEFO 2021–22 and Budget paper no.1 2022–23 all show a nominal
GDP growth for 2022–23 (relative to 2021–22) as lower that the real GDP growth for
the same relative period. This does not mean that nominal GDP falls; rather it
grows at a slower rate for that year relative to the year before because of
expected decline in the terms of trade as elevated prices for Australian
commodity exports fall.
It is unclear how the Treasury places expected economic
impacts of climate change into its models. It seems as if the economic effects
of weather events are modelled retrospectively as short term shocks to the
baseline economy, and as stated in the Australian
Government 2021 intergenerational report:
The effects will depend on domestic and global actions, as
well as the pace, extent and impacts of climate change.
With the advent of more frequent climate induced shocks and
the ability to measure clear trends of the economic impact of climate change,
it is probable that the baseline modelling will be altered to incorporate these
trends.
The Parliamentary Budget Office in its online publication 2022–23
Budget snapshot provides an historical time series of the 6 major economic
parameters including the performance of past forecasts, as well as other Budget
2022–23 forecasts.
Inflation risk and supply chains
In recent media speculation,
much has been made about the potential for inflationary pressures to increase
significantly in the short to medium term. The budget forecasts show a
temporary increase, which returns to longer run expectations that inflation
will remain in the RBA target range.
One of the issues with inflation, especially during periods of global and
domestic price shock, is the degree to which it is expected to be persistent
versus temporary.
A recent publication by the International
Monetary Fund (25 March 2022) points out that the COVID-19 pandemic led to
pent up demand from huge stimulus packages which overwhelmed the capacity of global
supply chains. This caused shipping costs to surge; the costs of shipping a
container increased seven-fold in the 18 months following March 2020. The IMF shows
that these shipping costs are an important driver of inflation around the
world, and that the effects peak after a year and last up to 18 months.
The effects are influenced by the share of imports in
domestic consumption and a strong and credible monetary policy. The study
concludes that:
the inflationary impact of shipping costs will continue to
build through the end of 2022. This will create complicated trade-offs for many
central bankers facing increasing inflation and still ample slack in economic
activity. Moreover, the war in Ukraine is likely to cause further disruptions
to supply chains, which could keep global shipping costs—and their inflationary
effects—higher for longer.
According to the Australian Government Productivity
Commission (22 July 2021), Australia is not particularly vulnerable to
import disruptions and, apart from iron ore, only 1.5% of the value of all
goods imported are vulnerable to disruption. Australia also has a strong and
credible monetary policy.
However, inflationary pressure around the world due to COVID-19
disruptions, particularly with cost increases in freight, and the war in
Ukraine could drive up price levels in Australia leading to inflationary
pressure. The duration and persistence of world inflationary pressures is
uncertain.
Forecasting and projections
Forecasts are outputs from models that aim to emulate the
functioning of the domestic economy within a global context. The modelling
outlines expected economic activity for the budget year (2022–23) and the
subsequent financial year (2023–24). Beyond the 2023–24 forecasts, projections
are based on expectations of the path back to the potential output of the
economy. The forecasts determine what is usually called ‘parameter variations’
in fiscal outcomes.
Because models cannot capture the full complexity of the
domestic economic system, assumptions must be made about some factors which
will influence the parameters. This introduces uncertainty into the forecasts. Budget paper no. 1 2022–23
(pp. 37 and 224) states that the detailed parameter forecasts which drive the
fiscal outlook are grouped into 3 key categories—prices, technical inputs and
judgement.
Price assumptions for key commodities impact on revenues
received by the Government. In general, many prices are expected to decline
from current levels by the end of the September quarter 2022, namely:
-
The iron ore spot price is assumed to decline
from US$134/tonne to US$55/tonne free on board (FOB).
-
The metallurgical coal spot price is assumed to decline from
US$512/tonne to US$130/tonne FOB.
-
The thermal coal spot price is assumed to decline from
US$320/tonne to US$60/tonne FOB.
-
Crude oil prices (TAPIS) are assumed to decline from
US$114/barrel to around US$100/barrel.
Technical assumptions, which influence the behaviours of
participants in the economy generally, may impact on budget results too, namely:
-
The exchange rate is assumed to remain around its recent average
level—a trade
weighted index of around 60.
-
The $US exchange rate is assumed to remain at around 72 US cents.
-
Interest rates are assumed to move broadly in line with ‘market
expectations’.
-
Population growth is forecast to be 0.7% in 2021–22, 1.2% in 2022–23
and 1.3% in 2023–24.
Expert technical judgements are applied to modelling outputs
to ensure realism. The judgements are about how one part of the economy might
affect other parts of the economy and how the domestic economic system is
affected by events in the international economy.
Forecast errors will always emerge and give rise to a
variance between real outcomes and expected ones. Confidence interval analysis
uses historical errors to assess the degree of uncertainty around current
forecasts. With continued high uncertainty in the world, forecast errors could
potentially be larger than in the past.
Sensitivity analyses are also used to examine uncertainty by
considering a range of values given to the key assumptions. For example,
modelling forecasts stated in Budget paper no. 1 2022–23 (p. 214)
provide a sensitivity analysis of the iron ore price on the nominal GDP
forecast and tax receipts. Treasury estimates that a US$10/tonne FOB increase
in the iron ore price will result in an increase in nominal GDP of around $4.4
billion in 2022–23 and increase in tax receipts of $0.2 billion in the same
year. Budget
paper no. 1 2022–23: Statement 7 provides further information on
confidence interval analyses and sensitivity analyses around the economic
parameter forecasts.
With the range of global uncertainties, and the general
assumption of returns to lower pricing, there will continue to be significant
swings in the parameters which drive the overall fiscal outlook.
All online articles accessed April 2022
For copyright reasons some linked items are only available to members of Parliament.
© Commonwealth of Australia
Creative Commons
With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.
In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.
To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.
Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.
This work has been prepared to support the work of the Australian Parliament using information available at the time of production. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.
Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Enquiry Point for referral.