Australia’s Budget Deficit Seen Narrowing Ahead of Election

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Australia’s fiscal position is likely in better shape than set out in the budget handed down seven months ago, providing the government with spending firepower ahead of an election due by May next year.

Treasurer Josh Frydenberg will forecast a deficit of A$76 billion ($54 billion) in the 12 months through June 2022, the median estimate of economists showed ahead of a mid-year update due Thursday. That’s about a A$30 billion improvement on the predicted shortfall in May’s budget.

The better outlook reflects an expected jump in corporate tax revenue as miners enjoyed windfall profits from high commodity prices, as well as an improved employment outlook from the end of virus lockdowns on the nation’s populous east coast. Australian firms are also boosting investment to help meet pent up demand from the nation’s cashed-up households.

While the conservative government had made a virtue of its efforts to return the books to the black in the lead up to the pandemic, the fiscal support needed to prop up the economy has now pushed that into the distant future.

Instead, the government will be trying to make a virtue of its economic stewardship through the crisis and will likely use some of the extra cash to pledge increased spending as it tries to win a fourth election. 

The ballot is “shaping up to be a close contest with the incumbent Liberal-National government consistently behind in the polls,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada.

A smaller deficit should result in Australia’s debt manager reducing its 2021-22 nominal bond issuance to roughly A$100 billion, Ong said.

The prospects for the economy are strong, with a separate Bloomberg survey showing upgrades to GDP forecasts for the period ahead.

QE ‘Hard-Stop’

UBS Group AG’s George Tharenou lifted his estimate for 2022 economic growth to 5.8%, exceeding the Reserve Bank of Australia’s 5.5% forecast. Such a strong outcome “would raise the risk that the RBA announces in February a hard-stop for quantitative easing,” he said. 

The central bank will review its A$4 billion weekly bond-buying program at its first meeting of the year, and most economists expect it will taper or even scrap QE then. That would then open the door to discussions on rate liftoff.

RBA Governor Philip Lowe has repeatedly said he won’t raise rates until actual inflation, not forecast, is well within the central bank’s 2-3% target. The bank forecasts it will only reach the mid-point of the band in late 2023. Financial markets are more optimistic, pricing in three hikes next year. 

An election spending spree in a hot economy may cloud the picture.

“We are reluctant to put much weight on forecasts past the next year,” particularly with an election in the offing, Ong said. 

She noted that buried in Thursday’s mid-year economic and fiscal outlook “will be outlays deemed ‘decisions taken but not yet announced,’ which will capture at least some policy announcements ahead of the election.”

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