CBA Federal Budget reaction: Treasurer looks to economic growth for medium-term debt reduction 

The 2022/23 Commonwealth Budget announced this evening is focused on supporting economic growth to help stabilise the high levels of Government debt built up during the COVID-19 pandemic – rather than spending cuts or higher taxes.

Commonwealth Bank of Australia Chief Economist Stephen Halmarick said: “This is both a pre-election Budget and a new phase in the Government’s fiscal strategy focused on stabilising the debt built up supporting the country during COVID-19. The Treasurer is looking to achieve a stabilisation of debt as a percentage of GDP through economic growth, rather than through spending cuts or raising taxes.

“The Budget reflects the robust state of the Australian economy and its rapid bounce back after the economic impact of the policies designed to slow the spread of COVID. As expected, falling unemployment and booming tax receipts from strong labour growth and a surge in commodity prices have delivered a A$38.1 billion improvement in the budget bottom-line in 2022/23, which help fund a number of initiatives.

“These include a range of measures to help people manage inflation-fuelled higher ‘cost of living’ expenses, such as a halving of the petrol excise levy for 6 months, a A$420 cost of living tax offset for low-and-middle income earners and a A$250 living payment to eligible welfare recipients.

“There are also commitments to invest in skills training, medical services and training for rural and regional Australia and increased support for those affected by the recent floods. There are measures to support small business cash flows, domestic manufacturing of COVID-19 vaccines, support for the tourism and travel sector, regional and water infrastructure, national security and defence.

“With the budget deficit now estimated at 3.5 per cent of GDP in 2021/22 and 3.4 per cent in 2022/23, the extra stimulus the Budget will apply to the economy is relatively muted. However, given rising inflation and strong employment and wages growth, we maintain our view that the Reserve Bank of Australia will raise interest rates in the near-term, with an initial increase to 0.25 per cent expected in June this year, rising to a peak of 1.25 per cent in early 2023.

Detailed commentary on the Federal Budget will be published later in an Economic Insights report available via https://www.commbank.com.au/federal-budget.html