The backdrop for this year’s budget

The backdrop for this year’s budget

Amid global inflationary pressures, the Australian economy has experienced a period of price instability and low growth. As inflation in most advanced economies remains above central bank targets, fiscal measures used to apply downward pressure on the price of goods have strained disposable incomes, as everyday Australians experience a cost-of-living crisis.

Current domestic economic conditions

Economic activity slowed considerably in Australia with GDP growth under pressure, driven by higher interest rates as Australia’s inflation target remains the Reserve Bank Board’s highest priority. The softening in economic growth did not translate into weaker labour market conditions, with the unemployment rate recorded at 3.9% at the end of December 2023.

In the housing market, both housing prices and rents continue to rise as underlying demand exceeds supply, indicative of a rental crisis.

Given these indicators, the Federal Budget’s cost of living relief and Stage 3 Income Tax cuts are an attempt to ease cost of living pressures on households aiming to boost medium-term economic growth.

Economic outlook

Real GDP growth is expected to decrease in 2024 to 1.2%, before recovering to 2.1% in 2025, according to RBA data.

It should be noted that the Government has presented a slightly more optimistic expectation on the short-term future of Australia’s inflation compared to the Reserve Bank. In his speech, the Treasurer outlined an expectation of realising its inflation target in the second half of 2024 which contrasts to the central bank’s expected timeline of June 2025 (as indicated just before the Budget).

In the labour market, unemployment is expected to increase gradually, reaching 4.3% by 2025. With this increase, wage growth is expected to soften over the same period.

It is mainly the additional revenue from continuing high commodity prices, including iron ore, and increasing tax revenues that have driven the forecasted surplus for the current year. However, this will slip into a deficit of approximately $28.3 billion in the following year.

BDO comment

The Government’s budget presents an optimistic view of the economy overall.

Given the incentives offered by various cost-of-living relief measures are likely to boost the availability of cash and hence inflation, this budget reflects the difficulties in dealing with voters’ expectations for subsidies and reliefs and constraining the inflationary pressures whilst encouraging optimistic growth.

As the current level of inflation in Australia at 3.6% remains above its 2-3% target, it remains to be seen whether the Government’s strong reliance on the RBA’s monetary policy (i.e. interest rates) will be effective in easing the inflationary pressures.

BDO's Federal Budget analysis

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