Fiscal overview

Budget Review October 2022–23 Index

Adrian Makeham-Kirchner

The budget is the expression of the Australian Government’s ‘fiscal policy’, an overview of how it intends to spend and tax in the context of prevailing macroeconomic conditions.

Budget October 2022–23 predicts a deficit on the main measure of the fiscal outcome, the underlying cash balance (UCB), for the 15th consecutive year, and forecasts continuing deficits over the forward estimates. These deficits have led to a long-term increase in government debt. The deficits and debt position are improved relative to the forecasts in the March 2022–23 Budget for the 2022–23 budget year but deteriorate in the forward estimate years from 2024–25.

It has been common practice for incoming Australian governments, from both sides of the political divide, to make claims about previous governments’ budget management. These claims are expressed through mechanisms like audits, functional and expenditure reviews, and concepts like ‘budget repair’. Often the outcome is that the financial position is worse than expected for an incoming government.

The October 2022–23 Budget has been framed against a similar background. During the election campaign, the then shadow Treasurer and Finance Minister committed to:

A waste audit to go through the budget line-by-line, department by department, after nine years of this Government fiddling the books and stashing money wherever they feel like it for their own political convenience, and also sensible savings to start that work of budget repair.

This audit has commenced, and is likely to be a feature of budgets under the Albanese Government, with the Treasurer noting in the Budget strategy and outlook: budget paper no. 1: October 2022–23:

While this Budget has begun the critical task of budget repair, further work will be required in future budgets to rebuild fiscal buffers and manage growing cost pressures. The Government will continue the task of reviewing programs in future budgets with a focus on enhancing the quality of spending and ensuring programs are efficient, effective and focused on national priorities. (p. 7)

This article aims to assist parliament understand the Albanese government’s fiscal strategy, and understand opportunities and pressures for budget repair.

Fiscal strategy

The Charter of Budget Honesty Act 1998 (the Charter) requires the Treasurer to deliver a fiscal strategy statement. The October 2022–23 Budget reports the first medium term fiscal strategy statement of the Albanese Government. At the outset, the strategy points to the high-level expectations for budget management over the medium term, noting:

Putting the budget on a more sustainable footing will ensure the Government has the fiscal buffers to withstand economic shocks and better manage the fiscal pressures from an ageing population and climate change. (Budget Paper no.1, p. 75)

To understand the strategy, how the Government intends to achieve a more sustainable footing, and to contrast it against the most recent version expressed in the March 2022–23 Budget under the Morrison Government, Table 1 outlines the key points side by side.

Compared to March 2022–23, the October 2022–23 principles have:

dropped a specific tax to gross domestic product (GDP) ratio
removed reference to net debt, in favour of gross debt
removed reference to a budget balance, in favour of budget repair
changed language towards concepts of inclusivity, full employment, sustainability, inclusion and adding other concepts like climate change into the targeting
removed explicit references to the private sector.

The strategy statement provides a lens through which parliament can measure the Government’s success against its own principles.

Table 1 Comparison of fiscal strategy March to October

March 2022–23 Budget	October 2022–23 Budget
Main statement
The Government’s Economic and Fiscal Strategy will drive sustainable, private sector-led growth and job creation and ensure Australia is well placed to respond to future shocks.	The strategy is focused on the objectives of strong, inclusive and sustainable economic growth, full employment, growing real wages, ensuring women’s economic participation and equality, and improving living standards for all Australians.
Principles
Stabilising and then reducing gross and net debt as a share of the economy	Limiting growth in spending until gross debt as a share of GDP is on a downwards trajectory, while growth prospects are sound and unemployment is low.
Targeting a budget balance, on average, over the course of the economic cycle that is consistent with the debt objective	Allowing tax receipts and income support to respond in line with changes in the economy and directing the majority of improvements in tax receipts to budget repair.
Controlling expenditure growth, while maintaining the efficiency and quality of government spending and guaranteeing the delivery of essential services	Improving the efficiency, quality and sustainability of spending.
Supporting revenue growth through policies that drive earnings and economic growth, while maintaining a tax burden consistent with a tax-to-GDP ratio at or below 23.9%	Delivering a tax system that funds government services in an efficient, fair and sustainable way.
Using the Government’s balance sheet to support productivity-enhancing investments that build a stronger economy, support private investment and create jobs	Focusing new spending on investments and reforms that build the capability of our people, expand the productive capacity of our economy, and support action on climate change.
Ongoing structural reforms to boost economic growth.

Source: Australian Government, ‘Statement 3: Fiscal Strategy and Outlook’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23 (p. 75); ‘Statement 3: Fiscal Strategy and Outlook’, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23 (p. 77).

Budget outcomes: within and between years

The general government sector (GGS) UCB for 2022–23 is expected to be in deficit by $44 billion (1.5% of GDP). This is a $34 billion (1.9% of GDP) improvement compared to the March 2022–23 forecast, due to a combination of windfall gains and new policy decisions (discussed below). However, compared to the outcome for 2021–22, the result is $12 billion worse (0.1% of GDP). Over the forward estimates the cumulative UCB will be $326.7 billion, which is $102 billion worse than expected at the March 2022–23 Budget.

Figure 1 illustrates the movement in key aggregates between the March 2022–23 and October 2022–23 budgets. For the budget year, the improvement of 1.9% compared to GDP is explained by a 0.6% of GDP improvement in tax receipts, a 0.1% improvement in non-tax receipts and a reduction in payments of 1.3% of GDP. Over the forward estimates and by 2025–26, when compared to the March 2022–23 Budget, any improvement in receipts is more than offset by increased payments. The Government includes a long-term forecast to 2032–33 as well, and on this measure the same pattern of higher payments to receipts continues, pushing the UCB deficit higher.

Figure 1 Difference in key aggregates between March and October (% GDP)

Figure 1 - Difference in key aggregates between March and October (% GDP)

Source: Parliamentary Library calculations based on Australian Government, Final Budget Outcome 2021–22; Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, and Pre-Election Economic and Fiscal Outlook 2022.

The consequences of the longer term UCB deterioration are higher debt and net interest payments; however, these are lower than forecast in March 2022–23. For example, by 2025–26 the March 2022–23 Budget expected net debt to be 33.1% of GDP; however, this was revised down to 28.5% of GDP the October 2022–23 Budget. Figure 2 illustrates these improvements as a proportion of GDP. Clearly, the relative improvement is reversed by 2032–33, by which point gross and net debt, and net interest payments, compared to GDP, are all higher than originally forecast.

More details about debt are provided in the Budget review article Australian Government Debt.

Figure 2 Difference in key balance sheet aggregates between March and October (% GDP)

Figure 2 - Difference in key balance sheet aggregates between March and October (% GDP)

Policy and parameter impacts

Budget aggregates are generally moved by two types of variation. These are policy decisions and economywide parameter variations. Policy variations are entirely the result of government decisions, whereas parameter variations are generally beyond the control of government.

The October 2022–23 Budget is framed against a backdrop of Australia’s recovery from the COVID-19 pandemic, contractionary monetary policy, a surge in global inflation, significant natural disasters, and an increasingly tense geopolitical environment.

Despite these issues, the Budget has reported significant short term windfall growth in receipts compared with earlier forecasts, due primarily to improvements in the short term macroeconomic outlook. These parameter gains in receipts are partly offset by ‘automatic stabiliser’ payments that are linked to parameters like inflation (for example social security payments).

The parameter variations are also partly offset by new policy measures introduced to address the Albanese Government election commitments.

A simple summary of the aggregate shift in the UCB from these policy and parameter variation is illustrated in Figure 3. In 2022–23, total parameter variations since the Pre-Election Economic and Fiscal Outlook (PEFO) have delivered a gain of $42.2 billion to the Government. Between March 2022–23 and PEFO, a smaller $567 million parameter gain was recorded. Offsetting this is $1.6 billion in policy variations recorded since the March 2022–23 Budget.

Figure 3 Policy and parameter variations impacting the October 2022–23 UCB ($m, nominal)

Figure 3 - Policy and parameter variations impacting the October 2022–23 UCB ($m, nominal)

Source: Parliamentary Library calculations based on Australian Government, ‘Statement 3: Fiscal Strategy and Outlook’, ‘Statement 4: Revenue’, and ‘Statement 5: Expenses and Net Capital Investment’, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23, and Pre-Election Economic and Fiscal Outlook 2022.

To understand the types of variation that can occur within a year, Figure 4 reconciles the March 2022–23 expected UCB to the October 2022–23 UCB. This illustrates that tax receipt parameter gains are the key driver of the improved outcome, and the negative impacts from major payment parameter variations – unemployment benefits, prices and wages, interest and exchange rates, GST payments to the states, interest payments and program specific variations.

Figure 4 Reconciling March to October 2022–23 UCB ($m, nominal)

Figure 4 - Reconciling March to October 2022–23 UCB ($m, nominal)

Source: Parliamentary Library calculations based on Australian Government, ‘Statement 3: Fiscal Strategy and Outlook’, ‘Statement 4: Revenue’, and ‘Statement 5: Expenses and Net Capital Investment’, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23; Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23; and Pre-Election Economic and Fiscal Outlook 2022.

Over the forward estimates the Budget has factored in less parameter variation, and additional policy variations. Policy variations are based on the announced budget measures. The parameter estimates will vary despite what the October 2022–23 Budget forecasts, due to forecasting challenges. The fiscal strategy, and statements from the Treasurer, suggest more banking of any parameter variations, with the Treasurer noting during Budget lock-up:

We are returning to the Budget, 99 per cent of that [upgrade to revenue] over the course of the next two years, when the inflation challenge is at its most serious, but more than 90 per cent over the forward estimates. And that is quite a substantial change when you compare it to recent practice in Budgets. That is a big part of what we're trying to achieve here, that spending restraint, particularly when it comes to those temporary boosts in revenue.

To achieve an improved budget outcome using policy decisions, where receipts and payments tend towards balance, would require a sustained reduction in payments, an increase in receipts, or a combination of both. The next sections look at the receipts and payments picture, in the context of the budget repair narrative.

Receipts

Total receipts for 2022–23 in the October 2022–23 Budget are expected to be $607.2 billion (24.5% of GDP). Of this $562.9 billion is tax receipts (22.7% of GDP), and $44.4 billion is non-tax receipts (1.8% of GDP). Non-tax receipts include sales of goods and services, interest received and dividends. Total receipts are $59.6 billion higher than expected for 2022–23 in the March 2022–23 Budget. Compared to the outcome for 2021–22, total receipts are $22.8 billion higher in October 2022–23.

Over the period from 2022–23 to 2032–33, receipts are expected to grow to 26% of GDP, of which tax receipts will be 24.1% of GDP and non-taxation receipts will be 1.9% of GDP. The total will increase as a proportion of GDP by 0.2%, compared to the forecast in March 2022–23. The March 2022–23 proportion was capped at 23.9% of GDP by the former government.

A time series of major receipts is available in the Revenue and expenditure article in this Budget review.

With persistent deficits on the horizon, it is instructive to assess how revenue policy might contribute to budget repair.[1] For example, a balanced budget could be achieved with an approximate improvement in receipts of 0.7% of GDP, all else being equal.

Policy options to improve revenue include:

increasing collections of revenues like personal income taxation, corporations’ taxation, and excise duties, whether by increasing the base or rates that apply to those revenues; alternatively, additional taxes may be added
reducing or removing tax measures and variations, or ‘tax expenditures’, like concessional tax rates, deductions, offsets and tax exemptions that apply to activities or classes of taxpayer to lower tax liabilities compared to what would otherwise be the case
reducing the taxation gap, an estimate of the difference between the amount of tax collected and what would have been collected if every taxpayer were fully compliant with tax law.

Reform to the system of taxation is potentially on the cards, but is not considered in this article.

The Parliamentary Budget Office provides a useful infographic of revenue by type over time in its 2022–23 October Budget snapshot. Tax expenditures are less transparent than other spending, however the Charter of Budget Honesty requires the Treasurer provide information about them in budget documentation. The Australian Taxation Office also provides some insights into the tax gap.

The Parliamentary Library has analysed recent available sources for these components, and illustrates the actual and potential revenue position as a proportion of GDP in Figure 3. Based on the analysis, for 2022–23 for example, in addition to expected revenue collections of 25.2% of GDP, reported tax expenditures are equivalent to 8.1% of GDP. Also, assuming the tax gap remains at around 7% of taxation revenue, this would account for an additional 1.6% of GDP in extra revenue if the gap were completely removed.

Figure 5 Actual revenue, tax expenditures and the tax gap (% of GDP)

Figure 5 - Actual revenue, tax expenditures and the tax gap (% of GDP)

Note: The GDP baseline for comparison is drawn from historical data for revenue. The tax gap existed prior to 2015-16 however the data is not in the ATO source, while projections are estimated based on an assumption that the net tax gap remains 7% of taxation revenue forecast in the Budget.

Source: Parliamentary Library calculations based on Australian Taxation Office (ATO), Annual Report: 2020–21, (Canberra: ATO, 2022), p. 65; Department of the Treasury (Treasury), Tax Benchmarks and Variations Statement, (Canberra: Treasury), various years (2021, 2020, 2019, 2018, 2017); Australian Government, ‘Statement 5: Expenses and Net Capital Investment’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table A.1, pp. 169–170; ‘Statement 11: Historical Australian Government Data’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table 11.8, p. 387.

With additional revenue of up to 9.8% of GDP in tax expenditures and the tax gap, considering reforms to these categories would support the budget repair strategy and improve the budget outcome.

Payments

Total payments for 2022–23 are budgeted at $644.1 billion (25.9% of GDP) in the October 2022–23 Budget. This is $18.5 billion higher than expected for the same period in the March 2022–23 Budget. Compared to the outcome for 2021–22, the 2022–23 level is $27.8 billion higher.

Like revenues, there is a range of ways expenditure policies might contribute to budget repair, including:

changing, restraining, or removing functions from the government’s expenditure base
changing the settings of programs to reduce coverage, restrain growth or increase contributions from participants; for example, debate has intensified over the future costs of the National Disability Insurance Scheme (NDIS with the Minister for the NDIS being quoted as prioritising ‘curbing growth, but not cost-cutting’, including seeking more financial support from the states
increasing the efficiency of expenditures, by reducing input costs.

‘Statement 6: Expenses and Net Capital Investment’ in Budget paper no. 1 provides insights into expenditure aggregates based on the functions of government.[2] Functional expenditures provide one way to understand which types of major expenditure groupings drive total expenditure, and act as a signal about the Government’s expenditure preferences.

A time series of major functional expenses is available in the ‘Revenue and expenditure’ article of this Budget review.

In Figure 6, the budget for each functional expenditure category for 2022–23 is ranked based on its percentage of GDP, individually and cumulatively. The top 5 functions – social security and welfare, ‘other purposes’, health, education, and defence – account for around 85% of payments, and 22.2 % of GDP. ‘Other purposes’ include interest, superannuation, goods and services tax payments for the states, local government assistance, natural disaster relief, and the contingency reserve.

Figure 6 Functional expenditures (% of GDP) and cumulative distribution (%)

Figure 6 - Functional expenditures (% of GDP) and cumulative distribution (%)

Note: The GDP baseline for comparison is drawn from historical data for expenses.

Source: Parliamentary Library calculations based on Australian Government, ‘Statement 6: Expenses and Net Capital Investment’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table 6.3, p. 177; ‘Statement 11: Historical Australian Government Data’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, Table 11.6, pp. 384–385.

Another way to look at expenditures is based on programmatic spending, and Budget paper no. 1 provides a list of the ‘top 20 programs’ (p. 180). These programs when combined account for 70% of total expenditure.

In Figure 7, the average annual rates of growth in these top 20 programs are illustrated, comparing the growth rate from 2017–18 to 2022–23, and then the forecast growth rate from 2022–23 to 2025–26.

Figure 7 Average annual growth rates in top 20 programs

Figure 7 - Average annual growth rates in top 20 programs

Note: The growth rates are calculated as compound annual growth rates and do not account for inflation.

In the fiscal strategy, the Government noted that ‘real payments growth is expected to average 0.3 per cent over the forward estimates’ (Budget paper no.1, p. 76). With a simple average inflation rate of 4% between 2021–22 and forecast 2025–26, this suggests an average nominal growth rate of less than 4.5%.

Across the top 20, the average annual nominal growth was 7.1% between 2017–18 and 2022–23 and is expected to be 5.8% over the forward estimates. Of the top 20 programs, 12 have a higher than average growth rate over the forward estimates including:

Interest on Commonwealth Government’s behalf (12.6% pa)
Support for seniors (5.9% pa)
Family tax benefit/assistance (6% pa)
Medical benefits (4.6% pa)
Income support for people with disability (4.9% pa)
Financial support for carers (6.6% pa)
Fuel tax credits scheme (13.3% pa)
Assistance to the states for healthcare services or public hospitals (6.4% pa)
Government schools national support (4.8% pa)
Childcare fee assistance or subsidy (9.9% pa)
National Disability Insurance Scheme (13.4% pa)
Aged care services (8.6% pa).

The final way expenditures can be compared is using economic expenditure categories – items such as payments to staff, purchases of services, grants, and interest payments. Figure 8 illustrates the distribution of these categories, as a per cent of GDP, for 2022–23. Where the functional and top 20 expenditures take an outcome view of expenditure, the economic categories present an input view.

The largest share is accounted for by current grants and subsidies combined, which includes grants to individuals, states and local governments, representing 8.6% of GDP (32% of expenditure). Combined, the payment of public sector staff, and the purchases they make, account for 8.4% of GDP (32% of expenditure). Personal benefits payments collectively account for 7.9% of GDP (23% of expenditure). The remainder accounts for 3.3% of GDP (13% of total expenditure). With 55% of expenditures accounted for in current grants, subsidies and benefit payments, marginal reforms to these payments would also contribute to budget repair.

Figure 8 Economic category expenditure profile for 2022–23 (% of GDP)

Figure 8 - Economic category expenditure profile for 2022–23 (% of GDP)

Source: Parliamentary Library calculations based on Australian Government, ‘Statement 10: Australian Government Budget Financial Statements’, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, 321.

Relatively marginal restraint in the level or rates of growth in any of the major functions, the top 20 programs, or in the inputs, will contribute to the budget repair strategy.

The challenge ahead

To address long term fiscal deterioration, the Albanese Government has taken some initial steps. It has banked a higher proportion of windfall gains than historically. On the receipts front, it has started with measures to reduce the tax gap. Describing expenditure decisions, the Finance Minister announced that the Government spending audit had begun, and:

The Albanese Labor Government’s first budget will deliver $22 billion in spending reductions and reprioritisations, beginning the hard task of budget repair and reversing the damage done by the former government over the last decade.

These reductions are over several years and are relatively small compared to the $644 billion annual payments base.

Compared to a repair task of around 0.7% of GDP per year ($44 billion in 2022–23), there appears to be much more restraint needed over the medium term to achieve the fiscal strategy goal that ‘ … gross debt as a share of GDP is on a downwards trajectory’ (see Table 1), unless there are additional windfall parameter gains.

[1] Receipts (cash) are used in general discussion as they impact the underlying cash balance. Revenue (accrual) are used for the analysis to ensure comparability with a range of sources. There are slight variations between cash and accrual measurements in the Budget.

[2]. Payments (cash) are used in general discussion as they impact the underlying cash balance. Expenditure (accrual) is used for analysis to ensure comparability with a range of sources. There are slight variations between cash and accrual measurements in the Budget.

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