Australian revenue upside allows purse strings and a smaller deficit

The strong performance of the Australian economy over the past six months has led to a sizeable revision of Treasury’s projections for the budget deficit. Stronger-than-expected revenue growth means a deficit of 3.5% of GDP is now expected in FY22, down from 4.5% of GDP in the last MYEFO from October 2021. The ongoing strength in the labour market and higher commodity prices are the main sources of the revision to revenue projections.

Rather than stowing away these windfalls and accelerating budget repair, the government has opted to use a portion of the funds to provide additional stimulus to the economy. These policies will provide further impetus to growth in the coming year but may also add to the inflationary pressures that ‘cost-of-living’ relief payments are looking to address.

What you will learn:

• The strength of the labour market since the Delta lockdowns in NSW, Victoria and the ACT, along with its resilience through the spread of Omicron has shored up the Budget position.
• Government expenditure is expected to be around $5 billion higher in FY22 (0.2% of GDP) compared to the forecasts in the MYEFO six months ago. 
• This increase in government transfers to households and forgone income tax revenue has led to a small upgrade to our outlook for 2022.