It’s been nothing but bad news for the Aussie budget for years on end – but it turns out things are actually starting to look up.
That’s according to leading Australian economist Chris Richardson, who has revealed that 2022 is “on track for a balanced federal budget”.
Mr Richardson explained that upcoming deficits look set to be better than budgeted just a few weeks ago “to the tune of $70 billion across the forward estimates” – and $14 billion this year alone.
But its not thanks to some “miracle” pulled by the government.
In a new update – which comes just five weeks after the Albanese Government released its budget – Mr Richardson explained that the main reason why revenues look set to outpace Treasury’s forecasts was not because something happened, but because “an unlikely thing didn’t happen”.
That “thing” was a catastrophic commodity price crash which the government has long predicted, but which is yet to eventuate.
For example, the recent budget assumed thermal coal prices would be $US60 a tonne by March 2023 – yet they’re now sitting at a whopping $US380 a tonne.
“We live in a world of bad news of wars and inflation, so you might be wondering how the hell we’re getting a better than expected budget, and the main reason is that things that are bad for the world like wars and inflation are actually good for the budget,” he told news.com.au.
“It’s an old story – if you owe a lot of money, and there’s a burst of inflation, you’re a winner, because if you’ve got big debts, you get to pay it back for effectively cheaper, with depreciated money.
“So Australia’s government debt looks less dangerous than it used to. We see this is happening all around the world – the biggest borrowers also are the biggest winners out of inflation.”
In a nutshell, inflation adds to revenues because the “taxable pie” is bigger – it boosts the dollars in the economy, which is what we tax – and because the government’s share of the pie is also bigger – families lose out under inflation, but bothbusinesses and the taxman grab the share that families lose, he explained.
“Basically, inflation is good news for the budget, and sadly so is war, for two reasons – what’s happening in Europe is pushing fuel and food prices up, and we sell fuel and food to the world,” he said.
“The other part of the story is that Treasury forecasts in a conservative way, which is fair enough, but particularly the forecast around commodity prices have become extremely conservative.
“Look at thermal coal, which is burnt to make electricity. They assumed it would drop in price by 85 per cent over six months from late September to March – that’s a dive that would earn gasps of admiration from the World Cup crowd, and it’s not happening.
“In fact, iron ore prices have gone up … and other key prices have come down a smidgen, but not much. The official forecast assumed an Armageddon on the prices of stuff we sell to the world, but that hasn’t happened, and it probably won’t happen.”
He said while the downturn in China would impact iron ore prices, it was also likely energy prices would stay high for a long time.
“Even if peace comes to Europe overnight, we won’t get peace in the energy market for a while because of Putin’s spectacular own goal in blowing up his own Nord Stream gas pipelines that take gas to northern Europe,” he said.
“And even if there is peace, nobody in their right mind would trust Russia as an energy trading partner – they turn energy on and off to suit their political needs in a moment, and the longer term implications are the world will switch to renewables even faster than it would otherwise, because fossil fuels are under the command of Captain Crazy – if you’re Germany, you’re not going to trust Russia.
“It’s bad for the world economy but bad and good for Australia, because we sell energy to the world.”
He said it was “just downright silly” to keep assuming there will be an “epic collapse” in prices.
“It keeps not happening, so every time we have a budget update, it has good news,” he said.
“Governments like to announce the budget is ‘better than we thought’ but in fact it’s a silly assumption they made that turns out not to be true.
“It’s not that the economy looks remarkably different to five weeks ago … it’s that the forecast assumed something silly would happen.”
Mr Richardson said the crash had been predicted since 2014 and that while he expected a fall would likely happen “at some stage”, it wouldn’t be as big as what Treasury claims.
Unfortunately though, he said the good news was “temporary”, and that bad budgetary news would “hang around” amid a continuing blowout in the cost of social services and defence.
“The balanced budget likely this calendar year will be as good as it gets, with a slide back into deficit, which I forecast to be back at $39 billion in 2025-26, or 1.4 per cent of national income,” he said.
He claimed this “it-gets-better-before-it-gets-worse” scenario will complicate Treasurer Jim Chalmers’ task of convincing the public of the case for budget repair.
“Another thing complicating the Treasurer’s task is the focus on the budget’s ‘trillion dollar debt’, not least because actual net debt is currently sitting at half a trillion. Yes, there’s a good case for budget repair, but it’s risky to overstate that case,” he said.
“Just think of your mortgage – lots of people have a mortgage, but lots of people also have got money in the bank. Gross debt does have the potential to hit a trillion dollars in a few years, and that’s like the size of your mortgage.
“But net debt – which is the figure economists use – is your mortgage, less what you’ve actually got in the bank. It’s your actual net liability. And our net debt at the moment is around $533 billion, and it has spent the last year or so falling, rather than rising.”