Australian Economy

Labor ‘must retain budget discipline’ to keep AAA rating

The incoming Labor government is inheriting more than a decade of deficits, and gross debt set to exceed $1 trillion, but a boom in commodity prices will bolster Labor’s budget in October.

The Coalition adopted a cautious approach to forecasting the price of key exports in its March budget, and iron ore and coal prices were assumed to drop markedly to their long-run averages by October.

For iron ore, that would mean the price more than halving from $US127 a tonne to $US55 a tonne, and thermal and metallurgical coal prices free-falling from $US442 and $US525 a tonne to US$60 and $130 respectively.

No change in economic output

“We believe significant upside is likely because commodity prices will outperform budget assumptions,” Mr Walker said, and inflationary pressures would also drive nominal GDP and tax receipts higher.

“Despite some expenses being indexed to inflation, and rising bond yields … it will take significant spending during the last three months of the 2022 fiscal year to hit the budgeted deficit [forecast].”

Marcel Thieliant, senior economist at Capital Economics, said while it was likely Labor would take “greater efforts” to decarbonise, as the bulk of mining output was exported, this should have little effect on mining.

AMP Capital chief economist Shane Oliver noted that Labor, like the Coalition, was largely relying on economic growth to repair the budget.

It “wants to shift the focus to the ‘quality’ of spending, suggesting a somewhat higher tax and spending share of GDP over the long term”, he said.

Gareth Aird, head of Australian economics at the Commonwealth Bank, said Labor’s agenda would have little impact on the economy; at least over the bank’s forecast horizon to the end of 2023.

“There will be some policy shifts, and that’s very much standard when you get a change of government. The question is, are those shifts going to change the economic outlook, and we think in the main, not at the moment.

“Most of the reforms they flagged are around policy areas that don’t really shift the dial in the way we look at the economy in terms of GDP, employment and inflation.”

CBA is forecasting the economy to grow by 4.4 per cent in 2022 and 2.6 per cent in 2023, while its tip is for the jobless rate to level out at 2.6 per cent.

“It’s clearly possible in coming months they start to announce some policies that weren’t flagged pre-election and that could shift the economic outlook.”

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