12 May 2015
Australian Budget won’t give the economy helping hand - Capital Economics
FXStreet (Bali) - In view of Paul Dales, Chief Economist Australia/NZ at Capital Economics, the 2015-16 Australian Budget will remove any talk of a credit rating downgrade, but won’t give the economy a much-needed helping hand.
Key Quotes
"The decision by Treasurer Joe Hockey not reduce the coming fiscal squeeze increases the pressure on the Reserve Bank of Australia to do more to support the economy by cutting interest rates below 2.0%."
"The strengthening in the Australian dollar after the Budget shows that the markets appreciated Hockey’s decision to stick to his plans to eliminate the cash deficit over the next five years. Standard & Poor’s and Moody’s both agreed, saying that the new forecasts don’t threaten the AAA rating.
"Hockey will see this as a victory, but it comes at the expense of not supporting the economy when it could use a helping hand. The Budget did include new initiatives that amount to a giveaway of $10bn (0.6% of GDP) over the next four years. But this was paid for by the decision to dump the previously announced paid parental leave scheme, which was expected to cost $10bn."
"The result was a net tightening in the fiscal stance, by $1.6bn over the next four years or 0.1% of one year’s GDP. That doesn’t dramatically alter the economic outlook, but it adds to the already substantial fiscal drag scheduled for the next few years. The sharp narrowing in the structural cash deficit (that bit of the deficit not influenced by the performance of the economy) over the next few years is enough to reduce GDP by 1.0% in 2015/16 and by a further 0.5% in 2016/17."
"Admittedly, in reality the fiscal squeeze won’t be that large. Although the Treasurer canned some of the deficit-reducing measures that were announced in last year’s Budget, some are still stuck in the Senate. And it remains to be seen how many of the new measures announced today actually make it into law. Even so, maintaining the significant fiscal squeeze is a fairly big kick in the teeth when the economy is already struggling to cope with the end of the mining boom."
"If we are right in expecting GDP growth to slow rather than accelerate in 2015/16 and 2016/17, then the cash deficit won’t narrow to $7bn (0.4% of GDP) in 2018/19 as the Treasury expects and the net debt to GDP ratio will peak above Hockey’s 18% forecast. We estimate that the deficit will still be $20bn (1.0% of GDP) in 2018/19 and that the net debt ratio will rise to 20%. That’s consistent with an increase in the downward pressure on the Australian dollar."
Key Quotes
"The decision by Treasurer Joe Hockey not reduce the coming fiscal squeeze increases the pressure on the Reserve Bank of Australia to do more to support the economy by cutting interest rates below 2.0%."
"The strengthening in the Australian dollar after the Budget shows that the markets appreciated Hockey’s decision to stick to his plans to eliminate the cash deficit over the next five years. Standard & Poor’s and Moody’s both agreed, saying that the new forecasts don’t threaten the AAA rating.
"Hockey will see this as a victory, but it comes at the expense of not supporting the economy when it could use a helping hand. The Budget did include new initiatives that amount to a giveaway of $10bn (0.6% of GDP) over the next four years. But this was paid for by the decision to dump the previously announced paid parental leave scheme, which was expected to cost $10bn."
"The result was a net tightening in the fiscal stance, by $1.6bn over the next four years or 0.1% of one year’s GDP. That doesn’t dramatically alter the economic outlook, but it adds to the already substantial fiscal drag scheduled for the next few years. The sharp narrowing in the structural cash deficit (that bit of the deficit not influenced by the performance of the economy) over the next few years is enough to reduce GDP by 1.0% in 2015/16 and by a further 0.5% in 2016/17."
"Admittedly, in reality the fiscal squeeze won’t be that large. Although the Treasurer canned some of the deficit-reducing measures that were announced in last year’s Budget, some are still stuck in the Senate. And it remains to be seen how many of the new measures announced today actually make it into law. Even so, maintaining the significant fiscal squeeze is a fairly big kick in the teeth when the economy is already struggling to cope with the end of the mining boom."
"If we are right in expecting GDP growth to slow rather than accelerate in 2015/16 and 2016/17, then the cash deficit won’t narrow to $7bn (0.4% of GDP) in 2018/19 as the Treasury expects and the net debt to GDP ratio will peak above Hockey’s 18% forecast. We estimate that the deficit will still be $20bn (1.0% of GDP) in 2018/19 and that the net debt ratio will rise to 20%. That’s consistent with an increase in the downward pressure on the Australian dollar."