It’s federal budget day and, at this stage, I’m due to appear on Steve Austin’s 612 ABC Brisbane Drive program after 6pm to talk about how the federal budget is developed, so please tune in if you’re interested.

Tonight we’ll learn just how much Australia’s extraordinary economic recovery has improved the budget bottom line from previous forecasts. The Australian is reporting:

The Australian understands the budget deficit for 2020-21 to be unveiled on Tuesday night will be $161bn compared with the $213.7bn forecast in the October 6 budget. This is a $52.7bn improvement and also accounts for a third stage stimulus spending program ahead of the next election.

The economy is doing much better than anyone expected (see chart below). NAB Chief Economist Alan Oster was right to describe the latest business survey data for April from his bank as “simply stunning”, as reported by Matthew Cranston in today’s Financial Review (Business conditions ‘simply stunning’ as confidence hits record high).

In terms of business conditions, which are at historical highs, Queensland is leading Australia in the NAB’s seasonally adjusted estimates (see chart below), but is a little below WA on the NAB’s trend estimates (see the NAB Monthly Business Survey April 2021). Are Queensland and WA doing so well because they’re the mining states, (noting the record high iron ore price which is of great relevance to WA)? Possibly. Here, I should note the high degree of sampling error at the state level in the NAB data. Also, I wonder whether COVID has so disrupted our sense of what is normal that we’re over-estimating just how good current conditions are. It’s implausible to me that business conditions are at record highs, although I do acknowledge there is a lot of positivity out there. Certainly the residential building industry, a big employer, is booming and households are spending money decking out new houses and apartments.

In the data, we may be seeing the lagged impacts of JobKeeper and the Coronavirus Supplement still operating on the economy (i.e. as households and businesses spend money they saved in previous months), but these programs have now been turned off. I also remain concerned about the potential for a COVID outbreak in Winter, sending capitals into lockdowns. Time will tell.

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