Economy doing most of the heavy lifting in 2023 budget says CEDA

Jarrod Ball, Chief Economist at CEDA (Committee for Economic Development of Australia), says the economy is doing most of the heavy lifting in the 2023 budget.

“While that is the path of least pain for budget repair, it is also far from assured and carries significant risks in a difficult economic environment, even if tax windfalls have surprised on the upside in the immediate term,” said Ball.

Is tax reform ahead?

“With a higher level of spending to be reached in the next decade and large spending commitments locked in, it is difficult to avoid the conclusion that structural tax reform will be needed, both to strengthen revenue and better support economic growth,” suggests the economist.

“Productivity remains the missing piece of the puzzle, with limited initiatives in the budget to support the productive capacity necessary to underpin future growth,” warned Ball.

The economist applauded the improvements to the budget position, saying they were all better than expected, with high commodity prices, a strong job market and healthy company profits underwriting this year’s surplus.

“Yet the government has still been relatively restrained, banking 82 per cent of economic windfalls to the bottom line and achieving average real spending growth of just 0.6 per cent a year,” Ball said.

Australia better off than most

Ball predicts that inflation, stronger than expected growth and lower deficits will see gross debt peak five years earlier and 10.4 per cent of GDP lower than at the last budget (36.5 per cent of GDP).

“This retains Australia’s relatively low debt position compared to advanced economies, and makes the fiscal task easier and opportunity cost of interest payments lower.”

While Ball said Australia is still expected to outperform amidst a continuing global economic downturn, global growth is at its weakest in over two decades and the impact of this will still be felt in Australia despite budgetary measures.

“In 2023-24, growth in the economy will be just 1.5 per cent, with unemployment increasing to 4.25 per cent,” Ball predicts.

“The good news is that 2023-24 is expected to see a turning point, with moderating inflation and growing real wages. As CEDA has previously suggested, a surging recovery in migration is supporting growth. This includes the increasing contribution of services to exports growth.”

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