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Economic Overview

The 2022/23 Federal Budget measures continue to provide support for economic growth and full employment. This year’s Budget will see aggregate expenditure of $625.6bn against receipts of $547.6bn resulting in a projected deficit of $78.0 billion, equivalent to 3.4% of GDP. The main initiatives include:

  • Supporting small businesses to adopt digital technology and train and upskill employees with new tax incentives.

  • Building and enhancing skilled workforce and industries, including $2.8 billion for apprentices and $2.2 billion to support Australian industries and universities to develop innovative companies and products.

  • Temporary cost of living package including a $420 offset for low and middle-income earners and $250 cost of living payment for eligible Australian pensioners, welfare recipients, veterans and concession cardholders.

  • Halving petrol and diesel fuel excise for six months.

  • $21 billion committed to ensure growth across key regional areas with upgrades in critical infrastructure including transport, water and communications.

  • Protect national sovereignty with increased security and defence capabilities with funding raised to above 2% GDP beyond 2022. Total outlays are projected to reach $575 billion by 2029-2030.

  • Extend investment in essential services with an additional $4.7 billion for health services and $1.3 billion to support delivery of the National Plan to End Violence against Women and Children 2022-32

Total government receipts are projected to reach $547.6 billion or 23.8% of GDP over 2022-23 which is expected to recover to 24.6% of GDP by 2025-26. Government payments rose to $625.6 billion in 2022-23, equivalent to 27.2% of GDP with a gradual decline to 26.3% of GDP by 2025-26. 



Chart 1: Australian Government Receipts and Payments


Source: Commonwealth government, Mercer


The underlying cash deficit last year was $79.8 billion, which improved by $19.4 billion compared to Treasury estimates from the mid-year economic review. This favourability was driven by two main factors being:

  1. stronger than anticipated iron ore prices; and
  2. robust recovery in the labour market.

This year’s underlying deficit is projected to reach $78.0 billion, equivalent to 3.4% of GDP which will improve to an estimated deficit of 1.6% of GDP by 2025-26. This means fiscal settings will continue to remain stimulative albeit at a reduced pace to aid economic growth. 

Chart 2: Underlying Cash Balance


Source: Commonwealth government, Mercer


Estimates for both gross and net debt have declined relative to prior year projections. Net debt is now projected to reach $714.9 billion or 31.1% of GDP by June 2023 and is expected to stabilise at 33.1% over the forward estimates before declining to 26.9% by June 2033. Australia’s pandemic response stimulus was largely funded through increased government debt which was consistent with trends observed across other major advance economies. Australia’s national net debt levels are low relative to the OECD and Mercer does not expect to see higher debt impact Australia’s credit rating over the medium term. The underlying cash deficit will continue to improve from automatic stabilisers out to 2033 where it is expected the deficit will reach around 0.7% of GDP. 


Chart 3: Australian Government Net Debt


Source: Commonwealth government, Mercer


This year’s Budget remains friendly for households as the government prepares for the upcoming election. Low and middle-income earners will benefit from cost of living payments of $420 and one-off payment of $250 to pensioners, veterans and concession cardholders. A temporary reduction in the fuel excise will provide welcome relief for households from higher petrol prices although at this stage for only 6 months. First homebuyers also stand to benefit from increased placements in the First Home Guarantee program. Flood relief package of around $6 billion will also provide assistance and rebuild support for impacted communities across Queensland and New South Wales.

For small business, main initiatives include rebates for increasing digital adoption and training for staff development. The government has also allocated additional funding to support growth in apprenticeships in crucial industries and pledged further spending to enhance modern manufacturing. Infrastructure spending was a big winner with the government committing further to enhancing regional connectively in key growth hubs and to further develop regional infrastructure. Schools and universities received minor assistance along with the tourism sector, which are still struggling to adapt to a post pandemic environment. Environmentalists will also be disappointed by new commitments to bring Australia into net zero carbon by 2050 with only an additional $47.3 million allocated for renewable energy initiatives. 


Australian economic growth is expected to expand further in 2022 and 2023 but at a slower pace as policy settings normalise and as global growth moderates. Treasury expects real growth in the economy to pick up to 4.25% over fiscal year 2022 and 3.5% in fiscal year 2023 which is consistent with Mercer’s growth forecast of 3.8% for end 2022.

Consumption growth in early 2022 has been mixed and retail activity only recently recovered from last year’s Omicron spike. Recent flooding in Queensland and New South Wales along with rising oil prices from the Russia/Ukraine conflict have pushed up the cost of living which has resulted in a sharp decline in consumer sentiment. Mercer expects household relief measures and tax subsidies to provide some offset although with inflationary pressures exceeding wage growth, household real consumption continues to come under pressure. Public investment has continued to support the broader recovery in the investment cycle and additional infrastructure investment will be welcome in lifting longer-term productivity. In the near term, this will help offset a decline in the housing market, which is expected to take the backseat this year as credit growth slows with underlying activity moderating as prices soften. 

Chart 4: Consumer Confidence

Source: Mercer

The labour market has recovered strongly with the unemployment rate down to 4.0%, the lowest since 2007. Treasury expects unemployment to fall further to 3.75% in fiscal year 2023. Mercer expects more robust growth in the labour market with unemployment in the second half of 2022 likely to reach around 3.5%. At this level, wage growth may become more apparent but with international borders normalising, increased labour supply may numb the pace of underlying wage pressures. 

Chart 5: Labour Market Indicators

Source: Commonwealth government, Mercer

On monetary policy, Mercer expects the Reserve Bank of Australia to tighten interest rates by around September as underlying inflation pressures rise which could take the cash rate to 50bps-100bps by the end of the year. Mercer expects fiscal policy settings will be mildly accommodative over the next two years but offset by tighter monetary policy. While this is expected to result in an overall net reduction in policy support, the economy by then would be on stronger foundations as growth broadens. 


This content is intended to inform clients of Mercer’s views on particular issues. It is not intended to be provided to any person as a retail client and should not be relied upon or used as a substitute for professional advice specific to a client’s individual circumstances. Whilst Mercer believes the prospective information and forward looking statements made by Mercer in this report are based on reasonable grounds, they are predictive in character and may therefore be affected by inaccurate assumptions or by known or unknown risks and uncertainties. This content has been prepared by Mercer Consulting (Australia) Pty Ltd (MCAPL) ABN 55 153 168 140, Australian Financial Services Licence #411770. Any advice contained in this content is of a general nature only and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering and seek advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. ‘MERCER’ is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917.

Copyright 2022 Mercer LLC. All rights reserved.


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