The Commonwealth Government handed down it’s Budget on Tuesday night. One of the most striking things about the Budget is that the Government will be in surplus for the 2022/2023 year.
A Commonwealth surplus means that the Government collects more in taxes and other revenue than it spends. This time last year, the estimate for 2022/2023 was that the Commonwealth would have a deficit of $78 billion for 2022/2023. The actual surplus is expected to be around $4 billion, meaning a ‘turnaround’ of $82 billion for the year. That is to say, at the end of June 2023, there will be $82 billion less flowing around the economy than we expected would be the case this time last year.
This unexpected surplus was caused by a combination of increased Government revenue and reduced Government expenditure. On the increased revenue side, the Government has collected much more in income tax, particularly from workers. As you can see in the following graph from the ABS, the amount of income tax paid by working people has risen by more than 5% since last year. Company tax is up a little as well, but most of the growth comes from workers, shown here in yellow:
There are two main drivers here. One is that, as people’s incomes rise, they naturally pay more in tax. The other is that there are more people working at the moment than has been the case historically. Unemployment remains very low at around 3.5%.
This low rate of unemployment provides a ‘double whammy’ for the Commonwealth. Not only does the Commonwealth collect more in income tax, it also has to pay out less in unemployment and associated benefits.
The increase in company tax has largely arisen because of increased commodity prices being paid on world markets. Many Australian companies sell into those markets – in particular mining companies – and these companies have seen their profits surge. The relatively low value of the $A has also helped here, as the commodities are sold in $US. Companies then convert these $US back into $A.
These increased commodity prices have also been responsible for much of the surge in inflation, so maybe we can take some comfort that they have also seen an increase in taxation receipts for the Commonwealth. Other companies like banks, who have profited from the increase in interest rates introduced to address inflation, have also made more profits and, therefore, paid more in tax.
As we will discuss next week, the Budget also introduces a relatively small amount of extra spending, which has led some commentators to suggest that the Budget may worsen inflation. This is unlikely. The turnaround from an expected deficit of $78 billion to a surplus of $4 billion means that $82 billion that was expected to be circulating in the economy has been removed from it. The fact that we have a surplus of $4 billion shows that the Government has decided not to spend most of the benefit of the turnaround. Overall, there is $82 billion less than we thought there would be in the economy, and there is literally $4 billion less in the economy overall. This Budget does not put more money into the economy and that should mean it is not inflationary.
In coming weeks we will look more closely at some of the specific changes heralded by the Budget. But for now, we will simply point out that a Budget surplus is an unexpected development for our economy. As it was caused in part by low unemployment, and because it has come at a time of high inflation, this unexpected development is a very welcome one.