Macroeconomic outlook

Budget Review October 2022–23 Index

Dinty Mather

The purpose of the macroeconomic outlook in October Budget strategy and outlook: budget paper no. 1 2022–23 Statement 2 is to present the economic forecasts completed by the Australian Government Treasury (Treasury). These forecasts underlie the Australian Government Budget and are used to assist in calculating budget year outcomes and projections of government revenue and expenses over the forward estimates (the fiscal outcome).

Domestic macroeconomic parameters

Macroeconomic conditions have worsened since the 2021–22 Budget, the Mid-year economic and fiscal outlook 2021–22 (2021–22 MYEFO), or the 2022–23 March Budget. Accordingly, Treasury forecasts for key domestic macroeconomic parameters have been revised downwards in the October 2022–23 Budget.

The revisions are largely driven by world events. The International Monetary Fund’s (IMF) October 2022 Outlook states that:

Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook.

The continued downward revisions over the past year illustrate the difficulty of forecasting the development of short term economic shocks. The revisions to 6 key economic parameters are illustrated in Figure 1 below.

Figure 1       Forecast and projected key economic parameters for the October 2022–23 Budget, March 2022–23 Budget, 2021–22 MYEFO, and 2021–22 Budget

Sources: Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: 2021–22, p. 9; Australian Government, Mid-Year Economic and Fiscal Outlook 2021–22, p. 17; Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23, p. 6; Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, p. 6.

Major trends reflected in the macroeconomic parameters are due to the following expectations:

  • Persistent inflation and subsequent rising interest rates are expected to put downward pressure on household spending, leading to a dampened demand for goods and services in the economy.
  • The current tight labour market is expected to ease as economic activity slows, resulting in slower employment growth.
  • Wages are forecast to grow in the next 2 years and as inflation dampens, by 2024 real wages are expected to increase for the first time since early 2021.
  • The upwardly revised growth in nominal GDP is a result of inflation persisting into 2022–23.
  • The highest commodity prices on record during 2021–22, largely reflecting the disruptions of natural gas flows from Russia to Europe, are expected to remain high during 2022–23. Prices are then expected fall back to the long term trend, resulting in a fall in the terms of trade in 2023–24 and creating negative nominal GDP in that period.

Productivity growth assumptions in  Budget paper no. 1 (p. 6) have been realistically downgraded to reflect a global trend. Although this assumption increases gross debt and debt servicing, it is offset by an assumed increase in productivity and participation through various workforce reforms.

The Parliamentary Budget Office in its online publication 2022–23 October Budget snapshot provides an historical time series of the 6 major economic parameters including the performance of past forecasts.

Forecasting assumptions, risks, and sensitivities

Forecasts are outputs from models that aim to emulate the functioning of the domestic economy within a global context. Macroeconomic forecasts are notoriously difficult to model from year to year and provide best attempts to estimate the extent and severity of economic shocks as deviations from the long term trend.

Because models cannot capture the full complexity of the domestic economic system, assumptions must be made which will influence the value of the parameters. This introduces uncertainty into the forecasts resulting in ‘parameter variations’ in fiscal outcomes. Budget paper no. 1 (p. 47) states that the detailed parameter forecasts, which drive the fiscal outlook, are grouped into 3 key categories: prices, technical inputs, and judgement.

Budget paper no. 1 (p. 47) sets out price assumptions for key commodities and their impact on revenues received by the Government. In general, key commodity prices are expected to decline from current levels by the end of the March quarter 2023, namely:

  • The iron ore spot price is assumed to decline from US$91/tonne to US$55/tonne free on board (FOB).
  • The metallurgical coal spot price is assumed to decline from US$271/tonne to US$130/tonne FOB.
  • The thermal coal spot price is assumed to decline from US$438/tonne to US$60/tonne FOB.
  • Crude oil prices (TAPIS) are assumed to decline from US$108/barrel to around US$100/barrel.

Technical assumptions, which influence the behaviours of participants in the economy, generally impact on budget results too, namely:

  • The exchange rate is assumed to remain around its recent average level – a trade weighted index of around 61.
  • The US dollar exchange rate is assumed to remain at around 65 US cents.
  • Interest rates in the Treasury forecast are informed by the Bloomberg survey of market economists.

Expert technical judgements are applied to modelling outputs to ensure realism. The judgements are about how one part of the economy might affect other parts of the economy and how the domestic economic system is affected by events in the international economy.

Forecast errors will always emerge and give rise to a variance between real outcomes and expected ones. Confidence interval analysis uses historical errors to assess the degree of uncertainty around current forecasts. With continued high uncertainty in the world, forecast errors could potentially be larger than in the past.

Sensitivity analyses are also used to examine uncertainty by considering a range of values given to the key assumptions. For example, modelling forecasts stated in Budget paper no. 1 (pp. 245–46) provide a sensitivity analysis of the iron ore price on the nominal GDP forecast and tax receipts. Treasury estimates that a US$10/tonne FOB increase in the iron ore price will result in an increase in nominal GDP of around $4.4 billion in 2022–23 and an increase in tax receipts of $0.5 billion in the same year.

Statement 8 of Budget paper no. 1 provides further information on confidence interval analyses and sensitivity analyses around the economic parameter forecasts and how they play out in the fiscal outlook. With the range of global uncertainties and the general assumption of returns to lower pricing, there will continue to be significant revisions in the parameter forecasts in the near future and thus alterations to the overall fiscal outlook and fiscal position.

Modelling climate change

The significant fiscal impact and risk associated with climate change is well understood and stated in Budget paper no. 1 (pp. 103–104). However, from an economic forecasting perspective, which informs the fiscal outcome, it seems as if the economic effects of weather events, for example the recent October 2022 floods, are modelled retrospectively as short term shocks to the long term trend (baseline economy). Although this makes sense, the advent of climate change and the resulting more frequent and extreme weather events point to a possible change in the baseline economy. This is complicated to model and as the Australian Government 2021 intergenerational report states (p. x):

The effects will depend on domestic and global actions, as well as the pace, extent and impacts of climate change.

Budget measures: budget paper no. 2: October 2022–23 (p. 190) however provides:

$29.8 million over 4 years from 2022–23 (and $6.9 million per year ongoing) for the Treasury to restore capability to model climate risks and opportunities.

Whether the endeavours of the Treasury to extend its capacity to model climate risks into the base economy will improve accuracy will not be known until future budget forecast reporting.  


All organisations and individuals base their macroeconomic models on their own sets of assumptions and expert opinions. However, most modellers examine the assumptions of others in an attempt to ‘beat the market’ by creating more predictive models. The following figures show competing model outputs from 5 organisations for 2 key macroeconomic parameters: economic growth as measured by real GDP and inflation as measured by the CPI.

Caution should be applied when comparing and benchmarking the October 2022–23 Budget to other forecasts. The current world and domestic economic situations are volatile, requiring updates and revisions to model outputs at very short intervals.

The 5 organisations that the October 2002–23 Budget economic growth and inflation forecasts are benchmarked against are: the March 2022–23 Budget, the Reserve Bank of Australia August forecasts, the IMF October interim forecast for both the world and the Australian (domestic) economy, Deloitte’s October Budget Monitor and the Oxford Economics October update. 

In general, the current Treasury modelling is within the bounds of alternative forecasting results.

Figure 2 demonstrates that although forecast macroeconomic growth to 2024–25 in the October 2022–23 Budget has been downgraded by 1% from the March 2022–23 Budget, it is within trend with other forecasting results.  

Figure 2       Real GDP forecast benchmarks

Figure 2 - Real GDP forecast benchmarks 

Sources: Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23, p. 6; Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: October 2022–23, p. 6; Reserve Bank of Australia, Statement on Monetary Policy, 5. Economic Outlook, August 2022; Deloitte Access Economics, Budget Monitor, 11 October 2022, p. 6.; Oxford Economics, World Economic Prospects Monthly, 12 October 2022; International Monetary Fund (IMF), World Economic Outlook: Countering the Cost-of-Living Crisis, (Washington, DC: IMF, 2022), p. 125.

The results from all the forecasters indicate that Australian economic growth is expected to be higher than world economic growth for 2022–23 but lower for the 2023–24 and 2024–25 periods. The IMF explains that lower than world growth for Australia from 2023–24 is expected because emerging market and developing economies will grow more strongly than advanced economies.

Subject to further unexpected macroeconomic shocks and geopolitical risks emerging, there is some consensus that both world economic growth and Australian economic growth are expected to recover after 2023–24. In other words, the world and Australian economic slowdowns are expected to last for at least another year and a half before they recover.

Figure 3 below illustrates that Treasury modelling of consumer price inflation for the October 2022–23 Budget appears to be broadly in line with that of other forecasters for 2023–24 and within close bounds for 2024–25.

Figure 3       Consumer price inflation forecast benchmarks

Figure 3 - Consumer price inflation forecast benchmarks 

Sources: Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: 2022–23, p. 6; Australian Government, Budget Strategy and Outlook: Budget Paper no. 1: October 2022-23, p. 6; Reserve Bank of Australia, Statement on Monetary Policy, 5. Economic Outlook, August 2022; Deloitte Access Economics, Budget Monitor, 11 October 2022, p. 6.; Oxford Economics, World Economic Prospects Monthly, 12 October 2022; International Monetary Fund (IMF), World Economic Outlook: Countering the Cost-of-Living Crisis, (Washington, DC: IMF, 2022), p. 125.

There is a consensus among all forecasters that the Australian CPI will be lower in all periods than world CPI. Again, this is due to higher inflation forecasts for emerging market and developing economies compared to advanced economies.  


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