Fiscal overview

Budget Review 2022–23 Index

Adrian Makeham-Kirchner

The 2022–23 Budget is framed by the context of Australia’s ongoing recovery from the impacts of the COVID-19 pandemic, significant natural disasters, and an increasingly tense geopolitical environment. Despite these issues, the Budget forecasts significant growth in revenue compared with earlier forecasts for 2022-23, reflecting an improved macroeconomic outlook. Growing and new expenditures, including a range of temporary measures, offset some of the windfall revenue gains.

The 2022–23 Budget outcome is expected to deliver a $78 billion deficit (3.4% of gross domestic product (GDP)), the 15th deficit in a row. This result is an improvement of $1.8 billion compared with the expected outcome from the 2021–22 Budget, and an improvement of $21.3 billion compared with the forecast for 2022–23 in the 2021–22 Budget.

Fiscal strategy

The Charter of Budget Honesty Act 1998 (the Charter) requires the Treasurer to deliver a fiscal strategy statement with each budget. The 2022–23 Budget has continued the Morrison Government’s medium-term fiscal strategy first outlined in 2020–21. The key elements are outlined in Box 3.1 of the Budget strategy and outlook: budget paper no. 1: 2022–23: statement 3: fiscal strategy and outlook, including:

stabilising and then reducing gross and net debt as a share of the economy
targeting a budget balance, on average, over the course of the economic cycle that is consistent with the debt objective
controlling expenditure growth, while maintaining the efficiency and quality of government spending and guaranteeing the delivery of essential services
supporting revenue growth through policies that drive earnings and economic growth, while maintaining a tax burden consistent with a tax-to-GDP ratio at or below 23.9%
using the Government’s balance sheet to support productivity-enhancing investments that build a stronger economy, support private investment and create jobs
ongoing structural reforms to boost economic growth.

These principles are important, as they influence how growth and reductions in key fiscal aggregates—receipts, payments, the underlying cash balance and net debt—are managed by the Government.

Budget outcome

The budget outcome is usually represented as the general government sector (GGS) underlying cash balance (UCB). The UCB measures the difference between receipts (comprising tax and non-tax receipts) and payments on a cash accounting basis. If receipts exceed payments a surplus is achieved; if payments exceed receipts, it is a deficit.

Changes in the UCB are driven by movements in receipts and payment measures. Movements in these aggregates can be classified as parameter or policy variations. Parameter variations occur because of changes in the macroeconomic outlook, the composition and size of the population and the consequential flow-on effects to revenue, and demand for government payments and services. Policy variations are explicit decisions taken by the Government, typically announced in Budget measures: budget paper no. 2: 2022–23. During a Budget year, these variations can also occur as part of the mid-year economic and fiscal outlook (MYEFO).

Figure 1 illustrates how policy and parameter changes contributed to the updated 2022–23 Budget UCB compared with the level forecast for 2022–23 in the 2021–22 Budget. The figure also includes the impacts between the 2021–22 Budget and the 2021–22 MYEFO. The figure illustrates that the change in UCB is driven mostly by parameter variations in receipts.

Figure 1 Movements driving the change in UCB from 2021–22 to 2022–23

Source: Australian Government, Mid-Year Economic and Fiscal Outlook 2021–22; Budget Measures: Budget Paper No. 2: 2022–23; Budget Strategy and Outlook: Budget Paper No. 1: 2022–23; Statement 5: Expenses and Net Capital Investment and Budget Paper No. 1: Statement 4: Revenue.

A similar figure can illustrate how policy and parameter impacts contribute to changes in the UCB outcomes over the forward estimates. Figure 2 shows the total contribution of parameter and policy variations to receipts and payments until the end of the forward estimates. In general, this shows receipts parameter variations are driving most of the UCB improvement. Noticeably, the 2021–22 payment policy decisions are relatively large, whereas subsequent policy variations are less, suggesting government is projecting lower new policy spending from additional parameter variations, which is improving the UCB.

Figure 2 Policy and parameter variations over the forward estimates

Analysing changing budget outcomes over time without allowing for price or population changes can give a distorted perspective of budget performance. Figure 3 illustrates the real per-person values of budget aggregates over time from Budget paper no.1: statement 10.

Figure 3 Real per-capita receipts, payments and UCB over time

Source: Australian Government, Budget Paper No.1: Statement 10: Historical Australian Government Data.

Payments have trended upwards since the early 1970s, and after a COVID peak in 2020–21, they are estimated to sit at $18,914 per capita in 2022–23. Receipts have followed a less straightforward trend with periods of growth and volatility, reaching $16,557 per capita in 2022–23. The gap between receipts and payments shows the UCB per capita, which sits at $2,357 in 2022–23.

By the end of the forecast period, the UCB is expected to have improved in nominal terms from a $78 billion (3.4% of GDP) deficit in 2022–23 to a $43.1 billion (1.6% of GDP) deficit in 2025–26.

Changes in payments

Total payments for 2022–23 are budgeted at $625.6 billion (27.2% of GDP). Variations over the 2021-22 financial year mean that payments are $32.3 billion higher than projected for 2022–23 in the 2021-22 Budget. Despite this change, compared to the expected outcome for in the 2021–22 financial year forecast 2022-23 payments are $10.8 billion lower.

Changes in payments have been driven by policy decisions and parameter changes. Policy-based payment changes between Budget 2021–22 and 2022–23 contributed $16.1 billion towards the change in UCB. Parameter changes to payments contributed a further $16.1 billion of the change.

Comparing expenditure on a functional basis (from Table 5a.1 in Budget paper no. 1: statement 4: revenue), notable changes in payments contributing to the difference between the 2021–22 estimated outcome and the 2022–23 Budget include:

defence (+$2.4 billion)
assistance to the states for public hospitals (+$2.3 billion)
assistance to people with disabilities (+$5.4 billion)
assistance to families with children (+$2.1 billion)
road transport (+$3.7 billion)
general public services (–$6.6 billion)
health services (–$8.8 billion)
other welfare programs (–$15.4 billion)
local government assistance (–$3.1 billion)
natural disaster relief (–$4.4 billion).

Some of these changes may be cyclical; for example, ‘other welfare’ includes COVID-19 support, and natural disaster relief expenditure is contingent on natural events.

Budget paper no. 1: statement 5: expenses and net capital investment provides insights into the ‘Top 20 programs’ ranked by expenses. This list excludes ‘interest payments on the Commonwealth Government’s behalf’, which is a significant amount. Combined, the top 20 programs and interest expenses account for $449 billion (71.4%) of total expenses in 2022–23. The top 5 programs, excluding ‘GST transfers to the states’, are ‘support for seniors’; the ‘National Disability Insurance Scheme’; ‘medical benefits’; ‘aged care services’; and ‘assistance to the states for public hospitals’. Eleven of the top 20 programs are in the health or social security and welfare portfolios.

New payment measures announced since the 2021–22 MYEFO total $31.5 billion over the forward estimates. Of this total, decisions taken but not yet announced (DTBNYA) lower the total by $550.5 million. However, the 2021–22 MYEFO added $47.9 billion in new payment measures that affected the baseline for 2022–23, within which DTBNYA accounted for $15.8 billion.

By the end of the forecast period nominal payments will be expected to have increased from $625.6 billion in 2022–23 to $687 billion in 2025–26. However, compared to the economy generally payments will decline from 27.2% of GDP to 26.3% of GDP, as the GDP growth rate is faster than payments growth. The ratio of payments to GDP persistently exceeds receipts to GDP over the forward estimates.

Changes in receipts

Total receipts for 2022–23 are budgeted at $547.6 billion (23.8% of GDP). Of this, $508.4 billion is tax receipts (22.1% of GDP), which is much lower than the fiscal strategy target of 23.9% of GDP. Variations over the 2021-22 financial year mean that total receipts are $53.6 billion higher than projected for 2022-23 in the 2021-22 Budget. Despite the improvement over 2021-22, compared to the estimated outcome for the 2021-22 financial year, receipts will be $9 billion lower in 2022-23, and $4.1 billion of this is from lower taxation receipts.

Changes in receipts have been driven primarily by parameter changes. Policy-based receipt changes between Budget 2021–22 and 2022–23 increased the UCB by $7.5 billion, whereas parameter changes to receipts reduced the UCB by $61.1 billion. The majority of the change was from higher employment and wages, increased household consumption and bulk commodity prices like coal and iron ore. The parameter windfall accounts for much of the improvement in 2022–23 and over the forward years.

Comparing the main receipt categories between 2021–22 and 2022–23 shows notable changes, including:

increases in total individual and other withholding taxes (+$11.6 billion)
increased excises on petrol, diesel and other fuel products (+$3.5 billion combined), including the impact of the cost of living adjustments
reductions in company tax (–$18.9 billion)
reductions in superannuation taxes (–$8.9 billion)
lower dividends and distributions (–$3.9 billion).

New receipt measures announced since the 2021–22 MYEFO reduce receipts by $31.5 billion over the forward estimates. Of this total, DTBNYA add back $2.4 billion. However, the 2021–22 MYEFO added $3.2 billion in new receipt measures that affected the baseline for 2022–23, within which DTBYNA accounted for $939.9 million.

Budget paper no. 1: statement 4 provides insights into tax measures and variations. These measure the estimated cost to receipts of major policy decisions. Overall, 34 measures are identified, and these will cost the 2022–23 Budget $204.9 billion of potential receipts, equivalent to 37% of total budgeted receipts. Among the largest tax measures are exemptions for private dwellings from capital gains taxation, superannuation taxation concessions, and goods and services tax exemptions.

By the end of the forecast period, receipts will be expected to have increased in nominal terms from $547.6 billion (23.8% of GDP) in 2022–23 to $643.9 billion (24.6% of GDP) in 2025–26. Taxation receipts will remain below the fiscal strategy cap, growing from 22.1% of GDP to 22.9% of GDP.

Net debt and interest

Net debt, according to Department of Finance concepts, is a ‘common measure of the strength of the Government’s financial position comprising liquid financial assets and interest bearing liabilities’. Generally, when the UCB is in deficit, net debt increases, as will interest payments to fund additional borrowings used to finance the deficit.

The UCB deficit in 2022–23 will contribute to an increase in net debt to $714.9 billion (31.1% of GDP). This is $83.4 billion higher than the estimated outcome for 2021–22. Compared with the forecast for 2022–23 net debt made in the 2021–22 Budget, net debt is lower by $120.1 billion. Despite the better than expected deficit, the overall increase year on year means net interest payments will increase by $200 million in 2022–23. Real net debt per capita stands at $21,615 in 2022–23, and will increase to $23,110 by 2025–26.

As a measure of sustainability, it is useful to compare net debt and net interest as a proportion of GDP over time. This allows for comparisons of government sustainability with the real economy. Figure 4 illustrates long-term net debt and net interest compared to GDP and shows the net debt to GDP ratio has grown essentially from 2008–09 onwards, but is forecast to level out over the forward years. Significantly, since 2013–14, net interest to GDP has hovered around a consistent 0.7% of GDP.

Figure 4 Net debt and interest

Source: Australian Government, Budget Paper No.1: Statement 10: Historical Australian Government Data.

By the end of the forecast period, net debt will be expected to have increased in nominal terms from $714.9 billion (31.1% of GDP) in 2022–23 to $864.7 billion (33.1% of GDP) in 2025–26. Net interest payments will be expected to increase in nominal terms from $15.1 billion (0.7% of GDP) in 2022–23 to $22.4 billion (0.9% of GDP) in 2025–26.

Beyond the Budget

Shortly after the 2022–23 Budget, the 2022 federal general election will be called. This has implications for the fiscal outlook, and potentially for the long-term trajectory of fiscal policy.

Once the House of Representatives is prorogued, Appropriation Bill (No. 1) 2022–2023 and Appropriation Bill (No. 2) 2022–2023 will lapse. This will not affect the continuing operation of the Government as Supply Bill (No. 1) 2022–2023, Supply Bill (No. 2) 2022–2023 and Supply (Parliamentary Departments) Bill (No. 1) 2022–2023 passed both houses on 30 March 2022. The supply bills provide appropriations in the event new annual appropriation Bills are not agreed before the start of the 2022–23 financial year.

Going into the election, several of the temporary measures announced as cost-of-living relief have passed both Houses already. For example, the Treasury Laws Amendment (Cost of Living Support and Other Measures) Bill 2022, Excise Tariff Amendment (Cost of Living Support) Bill 2022 and Customs Tariff Amendment (Cost of Living Support) Bill 2022 passed both Houses on 30 March 2022 to enable fuel excise reductions, cost of living payments and low and middle income tax offset changes to occur.

If the Morrison Government is returned following the election, the Budget and appropriation Bills as presented should stand. If there is a change in government, it is likely a new Budget and new appropriation Bills will be tabled. For example, the Shadow Treasurer has confirmed that, if elected, a Labor Government would bring down a Budget before the end of 2022.

Once the election is called, the Charter requires the secretaries of the Treasury and the Department of Finance to release a pre‑election economic and fiscal outlook (PEFO) within 10 days of the issue of the writ (s. 27). The PEFO will set out an updated macroeconomic outlook, or new ‘parameters’, and report on the fiscal position of the general government sector, ensuring that candidates have equal access to information to inform election policies. In addition, formal election costings, which may be requested under the Charter, will start to be published through the 2022 election costings and related websites.

Longer term

The Budget, and subsequently the PEFO, set out the current and short-term fiscal outlook. However, there are also well known long-term challenges for fiscal policy, as set out in the Treasury's 2021 Intergenerational report (IGR):

COVID-19 is expected to reduce the size of the future Australian population compared with previous forecasts for the next 40 years, mostly through changes in net overseas migration
the current government fiscal strategy maintains the tax-to-GDP ratio at or below 23.9%, based on the average tax-to-GDP ratio in the years between the introduction of the goods and services tax and the Global Financial Crisis (2000–01 to 2007–08); this constrains the potential growth in tax receipts
payments are expected to increase gradually as a share of GDP from the 2030s, and by 2060–61 are projected to be 27.7% per cent of GDP, mainly driven by health spending, but also by aged care spending and interest payments
the UCB is projected to improve to a deficit of 0.7% of GDP in 2036–37, but then widen to 2.3% of GDP by 2060–61
net debt is projected to peak at 40.9% of GDP in 2024–25, before falling to 28.2% of GDP in 2044–45 and then increasing to 34.4% of GDP by 2060–61.

Figure 5 compares the expected trajectories of major fiscal outcomes reported in the IGR with the fiscal outlook in the 2022–23 Budget.

Figure 5 2022–23 Budget trajectories compared with the 2021 Intergenerational report

Source: Australian Government, Budget Paper No. 1: Statement 3: Fiscal Strategy and Outlook, Australian Government, 2021 Intergenerational Report.

Post-election shifts in the short-to-medium term fiscal strategy may affect the IGR baseline and current forecasts. What is clear from current settings is that there is a long-term structural challenge, with payments exceeding receipts over the medium to longer term, and this will lead to a persistent UCB deficit and increases in net debt as a proportion of GDP.