Macroeconomic Outlook

Macroeconomic outlook

Budget Resources

Ian Zhou


The 2023–24 Budget’s ‘Economic outlook’ (Statement 2 in Budget strategy and outlook: budget paper no. 1: 2023–24) provides:

  • the Australian Government’s assessment of the overall health of the Australian economy
  • forecasts of key economic parameters that reflect Australia’s likely economic conditions over the forward estimates (2024–25 to 2026–27).

Forecasts of key economic parameters underlie many budget figures and are used in calculating projections of government revenue and expenses. Policymakers, investors and consumers can use the economic outlook as a guide to inform their decisions and plans.

Domestic macroeconomic parameters

Compared with the October 2022–23 Budget, the 2023–24 Budget forecasts for the 6 key domestic macroeconomic parameters have been revised upwards slightly, indicating a better-than-expected outlook (Figure 1).

Figure 1: Major economic parameters

Source: Australian Government, Budget Strategy and Outlook: Budget Paper No. 1: 2023–24, 6.

Real GDP growth

A key indicator of a country’s economic health is its gross domestic product (GDP), which measures the total value of all goods and services produced within a country in a given period. Australia’s real GDP –after adjusting for inflation – is projected to grow by 1.5% in 2023–24 and then maintain at least a 2% per annum growth rate over the forward estimates (Budget paper no. 1, p. 6).

GDP growth is driven by the ‘three Ps’: population, productivity and workforce participation.


The Budget forecasts total net overseas migration of 1.5 million people between 2022–23 and 2026–27 (Federal financial relations: budget paper no. 3: 2023–24, p. 118). Budget paper no. 1 notes that much of this figure reflects a large temporary increase, with net overseas migration ‘forecast to be 400,000 in 2022–23 and 315,000 in 2023–24’, followed by a return to normal migration levels from 2024–25.

The Government has attributed the near-term increase to an influx of international students and working holidaymakers – rebound effects from the lifting of COVID-19 pandemic travel restrictions and the subsequent economic recovery. It further argues that the projected post-COVID recovery in net overseas migration will contribute to restoring long-term population growth forecasts, reinforcing Australia’s economic rebound (Budget paper no. 1, p. 39).

Stakeholders in the business and healthcare sectors point out a critical shortage of skilled workers in their respective industries and argue it is crucial that skills shortages are addressed as part of the anticipated population intake (discussed below under the ‘wage price index’ section).

On the other hand, Opposition Leader Peter Dutton has criticised the Government’s migration policy and noted some of the challenges regarding the impacts of population growth. In his Budget reply, Mr Dutton argued:

The Albanese government’s big Australia approach was never mentioned before the election, but it will make the cost-of-living crisis and inflation worse … Over five years, net overseas migration will see our population increase by 1.5 million people. It’s the biggest migration surge in our country’s history, and it’s occurring at exactly the same time as a housing and rental crisis. Australians are struggling to rent or purchase a property now … And the government is now proposing to bring in almost 6,000 people per week, which will make a very bad situation even worse … A coalition government will sensibly manage migration, as we’ve done in the past, in conjunction with proper infrastructure planning.

Prime Minister Anthony Albanese has responded that migration forecasts were higher under the former Coalition Government. Treasurer Jim Chalmers has asserted that ‘Peter Dutton is playing the usual divisive and dishonest politics when it comes to population’.

The Age’s chief political correspondent commented on 11 May:

Labor is being pulled in two directions at once. It needs the migrant intake to sustain economic growth and prevent a recession, but it needs to keep the number in check to keep faith with Australians who worry that population growth is too high. It could revise the 1.5 million forecast downward over time.

If migration does add to inflation, this impact will potentially be felt more heavily in Queensland, due to internal migration trends. The Budget includes an assumption that around 99,000 people will migrate interstate from 2023–24 to 2026–27. Of these, 86,000 people are expected to move to Queensland, mostly from NSW and South Australia (Parliamentary Library calculations based on data in Budget paper no. 3, p. 119). This may create distributional challenges, additional to the nationwide economic impacts – positive and negative – of aggregate population growth.

For further detail regarding Australia’s migration program and the evolution of population forecasts since the former Coalition Government’s March 2022–23 Budget, see the Budget review 2023–24 article ‘Immigration’.


Productivity refers to how much output can be produced with a given set of inputs (labour, capital, raw materials). Put simply, the more productive a person or a company is, the more output they can produce with the same levels of input.

Productivity growth (as measured by labour productivity growth rate) has been one of the key drivers of increasing living standards and economic prosperity in Australia over the past several decades. However, Australia’s productivity growth has slowed down in recent years to an average of 1.1% (see Figure 2).

Figure 2: Australia’s average labour productivity growth over the past decades

Figure 2: Australia’s average labour productivity growth over the past decades 

Source: John Hawkins and Craig Applegate, ‘We know how to boost productivity and lift wages – but it will take time and much tougher tax reform’, The Conversation, 15 June 2023.

The Treasury expresses concerns that Australia’s productivity growth and hours worked are expected to decline further as global warming may push up average temperatures and lead to more frequent and severe natural disasters (Budget paper no. 1, p. 120). Consequently, the Government says its Budget fiscal policy is designed to ‘build the capability of our people, expand the productive capacity of our economy, and support action on climate change’ (Budget paper no. 1, p. 87).

Business groups have argued the Government could have done more to promote productivity growth, given the Budget contains few specific measures to drive business investment. More policies may emerge when the Government responds to the Productivity Commission’s 5-year Productivity Inquiry report, Advancing prosperity, and to the parliamentary inquiry into promoting economic dynamism, competition and business formation.


The employment-to-population ratio and the labour force participation rate are at near record-high levels, with the latter at 66.6% in 2022–23. The participation rate is projected to remain robust at 66.25% over the forward estimates (Budget paper no. 1, p. 56).

This projection is underpinned by the Government’s promise to improve women’s workforce participation and economic outcomes (Budget paper no. 1, p. 18). The October 2022–23 Budget introduced childcare reforms intended to increase the hours worked in paid employment by women with young children. Parenting Payment changes announced in this Budget will enable some single parents – 91% of whom are women – to receive the Parenting Payment Single instead of the JobSeeker Payment, allowing them to earn more income before losing eligibility.

Nominal GDP growth

Real GDP growth is adjusted for inflation, while nominal GDP growth is not. As such, Australia’s nominal GDP growth is directly influenced by swings in global commodity prices – in particular, the prices of iron ore, coal, natural gas and agricultural commodities.

Nominal GDP is projected to grow by 10.25% in 2022–23 due to higher-than-expected commodity prices (Budget paper no. 1, p. 6). The war in Ukraine has exerted inflationary pressures on food and energy commodity prices around the world, largely by driving exceptionally strong global demand for these commodities relative to available supply. China’s lifting of COVID-19 restrictions has similarly increased iron ore demand expectations and hence prices.

Australia is a commodity-exporting country and is well-positioned to benefit from these elevated prices. Higher-than-expected commodity prices over the past 12 months have helped to deliver a tax windfall, an underlying cash balance surplus and strong nominal GDP growth for Australia in 2022–23.

The Treasury says it expects nominal GDP growth to decline sharply – from 10.25% in 2022–23 to 1.25% in 2023–24 – and then remain low over the forward estimates, partly because commodity prices are forecast to decline swiftly to ‘long-term price levels’ (Budget paper no. 1, p. 75). For example, the Treasury assumes the iron ore spot price will decline from a March quarter 2023 average of US$117 to US$60 per tonne in 2023–24 (Budget paper no. 1, p. 77). Some of the assumptions are presented in Figure 3.

Figure 3: Commodity price assumptions in the 2023–24 Budget

Figure 3: Commodity price assumptions in the 2023–24 Budget 

Source: Budget Paper No. 1, 77.

However, as the Australian Financial Review has pointed out, federal and state treasuries have a long history of underestimating commodity prices. Whatever its technical merits, this approach does allow governments to frame the economic benefits from revising conservative commodity price forecasts upwards as budget improvements. The Treasury acknowledges that ‘the commodity price assumptions remain conservative and at the lower range of market forecasts’ (Budget paper no. 1, p. 73).

Consumer price index

The consumer price index (CPI) is a widely used measure of inflation. Rising inflation means the goods and services households buy will cost more, increasing the cost of living: that is, the same incomes will no longer command the same purchasing power. The Treasury believes inflation in Australia peaked in late 2022, and that it will moderate as global price shocks and supply constraints continue to ease. The CPI is forecast to decline from 6.0% in 2022–23 to 3.25% in 2023–24, and to less than 3% over the forward estimates (Budget paper no. 1, p. 6).

The Reserve Bank of Australia (RBA) has an inflation target of 2–3%. High inflation over the past 12 months has led the RBA to pursue a contractionary monetary policy, aggressively raising its cash rate target. The Government says its fiscal policy is designed to work in tandem with the RBA’s monetary policy to curb inflation (Budget paper no. 1, pp. 90–91). For example, the Government has committed to ‘avoid fiscal policy adding to inflationary pressures while these are at their highest’ (Budget paper no. 1, p. 193). The Commonwealth general government sector was estimated to record an underlying cash balance (UCB) surplus of $4.2 billion in 2022–23. Since the Budget was released, the outlook for this surplus has improved further, recording a $19 billion surplus in the year-to-date to May 2023. This surplus could be construed as a contractionary fiscal policy, where withdrawals (taxes) are greater than injections (transfers).

Total public sector expenditure, which includes spending by government-owned enterprises classified as ‘public non-financial corporations’ or ‘public financial corporations’; fall outside the ‘general government sector’ and so do not affect the UCB. Total public sector expenditure was expected to record a negative cash deficit of $7.8 billion in 2022–23 (Figure 4). This means that government-owned enterprises are still injecting more money into the economy than they are withdrawing, which, in principle, could add to inflationary pressures, and offset some of the benefits of the UCB surplus. For example, the International Monetary Fund (IMF) argues that fiscal policy may be carried out via government-owned or controlled enterprises engaged in commercial activities (IMF, Government finance statistics manual, 2001, chapter 2, p. 6), not just via general government sector expenditure.

Figure 4: General government sector’s underlying cash balance vs total public sector’s cash balance

Source: Budget Paper No. 1, 355–66; Australian Government Consolidated Financial Statements Tables and Data.

The total public sector’s $7.8 billion cash deficit in 2022–23 has led commentators to question the Budget’s narrative of a contractionary fiscal policy. For example, the Australian Financial Review’s economics editor argued it was a ‘big fib that the budget will take pressure off inflation and interest rates’. He pointed out that after the small $4.2 billion surplus in 2022–23, cumulative deficits for the general government sector over the next 4 years are forecast to be $110 billion, with a further $59.6 billion in so-called ‘off budget’ or ‘alternative’ financing of government policies via loans and investment funds. Such a large injection of money into the economy, he argued, ‘won’t help ease the pressure on interest rates’. As such, while the continued strong cash inflows to the Government in May have overshadowed the total public sector cash deficit, it remains important to consider more than just the UCB when analysing the complex relationship between inflation and fiscal policy.

Wage price index

The wage price index (WPI) is used to monitor changes in labour costs over time, which can be indicative of labour market conditions. The Government argues that the strength of recent labour market outcomes is flowing through to wages, with nominal wage growth projected to reach 4% in 2023–24 – the highest rate since 2009. Over the forward estimates, nominal wage growth is forecast to remain robust at 3.25% or higher (Budget paper no. 1, p. 6).

Robust wage growth typically reflects a tight labour market with skills shortages. Minister for Home Affairs Clare O’Neil has stated that the Government will enable the skilled migration needed to address skills shortages, complemented by medium and longer term efforts to address domestic skill deficits through education, training and sectoral reforms. (For further detail, see the Budget review 2023–24 articles ‘Immigration’ and ‘Tertiary education’.)

Employment and unemployment

The budget papers report that strong employment growth in Australia has kept the unemployment rate at 3.5% in 2022–23, almost a 50-year low (Budget paper no. 1, p. 71). Unemployment rates are projected to remain low by historical standards, rising modestly to 4.25% in 2023–24 and 4.5% in 2024–25. This offers a 2-fold benefit to the Budget: the Government will need to spend less on welfare transfers, and it will receive more income tax.

On the other hand, the employment growth rate is expected to moderate as the economy slows, dropping from 2.5% growth per annum in 2022–23 to 1% per annum over the next 2 years. Despite this deceleration, the Budget forecasts that the unemployment rate will remain low out to 2033–34, at Treasury’s assumed Non-Accelerating Inflation Rate of Unemployment (NAIRU) of 4.25% (Budget paper no. 1, p. 79).

The NAIRU is the lowest unemployment rate believed to be sustainable without fuelling wage and consumer price inflation, and is factored into Treasury and RBA policymaking.

The Sydney Morning Herald economics editor, Ross Gittins, has questioned the usefulness of the NAIRU as a policy guide. He has long argued the Treasury sets the assumed NAIRU too high, leading Australia’s economic managers to accept higher unemployment than is strictly necessary to keep inflation in check.

Furthermore, while the unemployment rate is an important economic indicator, in isolation it does not provide a complete picture of Australia’s labour market or the quality of jobs available.

Outlook for the global economy

Australia is a small open economy heavily reliant on trade for its economic wellbeing. As such, the budget forecasts for Australia’s economic health are affected by the global economic outlook.

Elevated inflation, interest rate rises and high levels of public debt are all expected to constrain growth in advanced economies. Global economic growth over 2023 and 2024 is projected to be the weakest seen since the early 2000s, outside of the Global Financial Crisis and pandemic (Budget paper no. 1, p. 43).

China’s improved outlook, following its rapid transition from the zero-COVID policy, contrasts with these sluggish growth expectations elsewhere. Chinese growth may prop up commodity prices and contribute to Australia’s economic rebound over the forward estimates.

Australia’s growth is expected to exceed that of all major advanced economies in 2023 (Budget paper no. 1, p. 43). In 2024, Treasury analysis suggests Australian GDP growth will exceed that of the UK, the Euro area, the US and Japan, but fall below that of China, India and the world more broadly (Figure 5).

Figure 5: GDP growth of other countries

Source: Parliamentary Library calculations based on Budget Paper No. 1, 44.

Sensitivity analysis and comparisons

The Budget’s macroeconomic forecasts are underpinned by a range of assumptions and judgements by the Treasury at the time of preparation.

Some external organisations provide their own assessments of Australia’s economy, and alternative forecasts of major economic parameters (Figure 6).

Figure 6: Forecasts of major economic parameters provided by the Treasury, IMF, RBA and Deloitte Access Economics

Source: International Monetary Fund, Australia – Country Data; Deloitte Access Economics, Business Outlook, March 2023; Reserve Bank of Australia, Statement on Monetary Policy – May 2023.

In practice, economic and fiscal parameters rarely evolve exactly as forecasted. Such variations can have a significant impact on the Budget – as noted above. Statement 8 of Budget paper no. 1 provides further information on the confidence and sensitivity levels of the Treasury’s economic parameter forecasts. For example, Figure 7 illustrates the range of potential outcomes modelled for real GDP growth under different scenarios and input assumptions.

Figure 7: The range of potential outcomes modelled for real GDP growth

Figure 7: The range of potential outcomes modelled for real GDP growth 

Source: Budget Paper No. 1, 268.

Deviation from the published forecasts for GDP – and other economic parameters – will significantly affect the fortunes of future budgets, for better or worse.