Economic strategy: Boom time budget

About the author:

Michael Knox
Author name:
By Michael Knox
Job title:
Chief Economist and Director of Strategy
Date posted:
30 March 2022, 9:22 AM




Australia has now emerged from the COVID crisis at rocket speed. Unemployment has fallen to levels not seen for many years. Treasurer Josh Frydenberg began his address with words reflecting a world in crisis.

“War rages in Europe” he said. “Australia remains strong”, he said. Still, the fact is that Australia has emerged from this crisis and is now improving at rocket speed. Our terms of trade have improved dramatically. We are now entering a boom time period of growth in the Australian economy. Unemployment has already fallen to levels not seen for many years. It will fall further.

Not only will unemployment fall further, but unemployment will stay low. Just as in previous periods of low unemployment, real wages growth will accelerate. We think the Budget Papers underestimate how strong wages growth can be. We see the outlook in 2022-23. After extremely strong GDP growth of 4.25% in 2022-23, growth will continue at a rate of 3.5% in 2022-23. In the years following this, growth will continue at a 2.5% rate.

This strong growth in GDP generates strong employment growth. After 2.75% employment growth in 2021-2022, employment should grow at 1.5% in 2022-23. It should grow again at 1.5% in 2023-24. Growth should continue at another 1% in 2024-25. The result of this very rapid employment growth is very low unemployment.

Australian unemployment is already at a multi-year low of 4.0%. The Budget Papers suggest it will fall to 3.75% in 2022-23 and then stay at that level for the next 3 years. We think it will fall further than 3.75%. Remember, that in the US, the Federal Reserve is already suggesting an unemployment rate for the same years of 3.5%.

There is considerable research done by the RBA on what happens to real wages as unemployment falls. This research is available in a number of articles in the Reserve Bank Bulletin. As unemployment falls, inflation rises but wages rise faster. This means, at low levels of unemployment, wages rise in real terms. Ordinary wage earners become better off. In Figure 2 of Budget Paper No 1 we see the decline of unemployment in 2022-23. At this very low level of unemployment, wages will be rising faster than inflation.

Some commentators simply do not appreciate how low this level of unemployment will be. They do not appreciate how scarce workers will be relative to previous years in this century, let alone in many periods last century.

These very low levels of unemployment mean that workers will be very scarce and hard to find. In this circumstance, employers will have to compete with each other by paying workers more. The simple reason why real wages will be so strong is that workers will be so scarce. The reason real wages will be so much stronger than other periods is that workers will be much scarcer than in previous periods.

The strength of the economy means that the budget deficit improves more rapidly than previously expected. An underlying cash deficit of $78 billion in 2022-23 means that the deficit will have eased to 3.4% of GDP, down slightly from the 3.5% of GDP deficit of 2021-22. Still, this is a significant improvement from the deficit in 2020-21 of 6.5% of GDP. 

2023-24 sees the deficit fall to 2.4% of GDP, declining further to 1.9% of GDP in 2024-25 and 1.6% of GDP in 2025-26. Gross debt to GDP peaks at 44.9% of GDP in 2024-25. Net debt to GDP peaks at 33.1% of GDP in 2024-25, remaining at that level in 2025-26. These levels of net debt to GDP are around one third of the level of net debt to GDP in the US.

In Figure 4 below, we see the improvement in budget outlook compared to financial year 2021-22. We can see how stronger growth and lower unemployment has generated an improved trajectory of the budget balance. This outlook is now vastly better than that what was feared in the middle of 2020 and 2021.

Figure 4: Underlying cash balance as a share of GDP

World Gross Debt-to-GDP (Consensus forecasts and Treasury Estimates)


General Government Expenses

The total expenditure is an enormously large $628.5 billion. Even in these very improved times, Social Security and Welfare is the largest item for which the Federal Government provides funding. In 2022-23, this totals $221.7 billion or 35.3% of spending. The next largest is Health spending of $105.7 billion, or 16.8% of spending. Education is next costing $44.8 billion or 7.1% of spending. Even though Defence has been a priority in this budget, total spending is only the fifth largest. In 2022-23 Defence will total $38.3 billion or 6.1% of spending. Transport and Communication is an area of considerable infrastructure spending under this budget. This sees total spending of $18.9 billion or 3.0% of spending.

What this Budget does

Australia has now emerged from the crisis of COVID. We are emerging into a world in which there is a staggeringly large demand for what we sell. There has been a dramatic increase in the demand for our iron ore, for our coal, for our gas and now, for our wheat. All of these are generating a dramatic improvement, not just in our balance of trade, but also in our current account balance.

Australia is running a current account surplus for the first time since the 1970s. History tells us that previous periods of current account surpluses and high terms of trade, such as now, generate strong growth in Australian national income. Such times see extended periods of low unemployment and rising real wages. It is overwhelmingly apparent that we are entering such periods. This economic strength can provide this country with a great range of possibilities.


Australia has now emerged from the COVID crisis at rocket speed. Unemployment has fallen to levels not seen for many years. This will generate real wages growth at a rate not seen for many years. This economic strength can provide this country with a great range of opportunities.

Let us hope we do not squander them.

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