Australian Budget Near Surplus as Chalmers Joins Inflation Fight

(Bloomberg) — Australia may record its first budget surplus in 15 years, bolstering the center-left government’s economic credentials as Treasurer Jim Chalmers moves to reinforce the central bank’s efforts to peg back inflation.

Economists reckon Tuesday’s fiscal blueprint will show a A$5.35 billion ($3.6 billion) shortfall, or 0.25% of GDP, in the 12 months to June 30. Local media report the government will deliver a slim surplus amid windfall revenue from high export prices and bigger income tax-take due to low unemployment.

The treasurer has refused to comment on whether the books are back in the black, saying all will be revealed at 7:30 pm Sydney time Tuesday.

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Typically, a budget surplus in Australia is a political victory for the government as it indicates strong economic oversight — even if driven by external forces. But now, with inflation running at 7% and interest rates rising at the fastest pace in 30 years, bringing fiscal policy in line with monetary settings is crucial to cooling prices and easing pressure on a struggling electorate.

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“It will be important for the government to operate fiscal policy in a manner that is consistent with monetary policy as presently elevated levels of inflation should be addressed through a coordinated policy approach,” said Yaying Dong, a macro strategist at Credit Suisse Group AG. “This will suggest spending measures to be more targeted as opposed to broad based.” 

The Reserve Bank of Australia has raised the cash rate 11 times since last May to 3.85% — a level not seen since April 2012 — and has signaled a willingness to tighten further to ensure inflation returns to its 2-3% target.

Dong, who is predicting a modest budget surplus this year, is among a number of economists who expect the treasurer will keep spending in check.

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If Chalmers successfully charts a course back to the black, it will be a rapid turnaround from the height of the pandemic when Australia ran a budget deficit of A$134.2 billion, or 6.5% of gross domestic product. The interest costs on the enormous debt racked up have also soared as a result of rate rises.

A surplus in the current fiscal year is likely to be a one-off with commodity prices falling back amid a slowing global economy and higher interest rates expected to push up local unemployment. In addition, an aging population and rising demand for services like health will lift costs.

A Bloomberg survey of 17 economists showed the median estimate for the 12 months through June 2024 is a budget deficit of A$22.25 billion, or 0.8% of GDP, swelling to A$35 billion, or 1.5% of GDP, the following year.

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Chalmers, in an interview with Bloomberg News on Sunday, acknowledged the fiscal picture is set to grow more challenging in the years ahead.

“The structural pressures on the budget actually intensify rather than ease after that,” the treasurer said. “That is a focus of the budget too. We’ve got a structural challenge.”

Still, a surplus this financial year is a boon for Australia, one of the few with a coveted AAA credit rating from all three major agencies.

The US budget deficit is currently 6.9% of GDP while fiscally cautious Germany’s is at 2.6%, according to data compiled by Bloomberg. In contrast, the Irish government predicted surging corporate-tax income will help widen its budget surplus to €10 billion ($11 billion) this year.

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Many economists and former senior officials have urged the government to tackle Australia’s dated tax system. But the politics of tax reform are perilous.

Among revenue measures which will be detailed in the budget is a revamping of Australia’s petroleum resources rent tax, which is expected to raise A$2.4 billion over the coming years by capping generous deductions for the gas industry. The cap will come into place on July 1.

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“The election cycle allows a very narrow window to make some tough principled choices and reforms,” said Stephen Anthony, managing director at Macroeconomics Advisory who previously worked at Treasury. “The time is now for budget reform.”

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What Chalmers had been vocal about is providing support for Australians who are struggling to make ends meet amid elevated inflation and high borrowing costs. He has also indicated possible higher unemployment benefits for people over age 55, a boost to the allowance for single parents, energy cost relief and more support for childcare payments. 

The centerpiece of the 2023-24 budget will be a package of measures worth A$14.6 billion over four years to assist households with growing cost-of-living difficulties from elevated inflation. This will include spending to reduce energy costs for millions of households and small businesses.

“The out-years for the budget still look like large deficits,” said Diana Mousina, deputy chief economist at AMP Capital Markets in Sydney.

—With assistance from Cynthia Li and Ben Westcott.

(Updates treasurer interview, cost relief for households.)