Economists say the budget contains few surprises and won’t stop the Reserve Bank from lifting interest rates this year, but some are disappointed the Government didn’t unveil larger spending cuts.
Commonwealth Bank of Australia economist James McIntrye says the enormous levels of investment in the nation’s resources sector should force the RBA’s hand shortly, tipping official rates will reach 5.25% by the end of 2011, from current levels of 4.75%.
National Australia Bank chief economist Alan Oster says “there is nothing in the budget to change the RBA’s view that tighter monetary policy is required in the current environment.”
Tipping rates would increase to 5.25% by September, Oster warns the hikes will “not help the challenges that face some sectors and states in the multi-speed economy.”
In its statement on monetary policy released last week, the RBA said year-ended underlying inflation is expected to pick up throughout 2011, reaching 3% next year and lifting to 3.25% by the end of 2013. Its comments led economists to revise their interest rate outlooks, with many now tipping two increases by the year’s end as labour, fuel, housing and utility costs weigh on inflation figures.
Nomura chief economist Stephen Roberts expressed disappointment the Government did not reveal larger spending cuts.
“They made a big play of $22 billion worth of savings but in headline budget terms there is about $19 billion of spending,” Roberts said.
“They should have gone much easier on the spending side.”
But AMP Capital chief economist Shane Oliver says the Government has gone hard in terms of spending cuts, nominating savings in defence, the public service and the halving of the discount for paying university fees upfront.
Saul Eslake, former ANZ economist and now with the Grattan Institute, was less kind this morning on Sky television, saying Treasurer Wayne Swan could have sat on the beach at Noosa for six months and the budget bottom line wouldn’t have looked any different.
NAB’s Oster says while the budget is a “credible document”, he agrees the Government could have gone further seeing Australia is experiencing the largest terms of trade boom in 140 years.
“It would have been reassuring to have seen some thought given to the adjustment phase when the boom eventually peters out,” Oster adds.
Oster agrees with the Government’s forecast that gross domestic product growth will accelerate to 4% in 2011-12, and notes that the Government expects underlying inflation to be running a little below the RBA’s latest forecast, which is consistent with its softer GDP growth forecast.
Meanwhile, Deutsche Bank chief economist Adam Boyton saw the budget as neither tough nor surprising, with the Government tipped to achieve its surplus promise by 2012-13 by sheer force of will (and favourable terms of trade, of course).
Westpac, meanwhile, says while the budget is forecast to be in surplus from 2012-13, the buffer is “wafer thin”, leaving precious wriggle room should trouble strike.
“Any downside surprise to economic conditions or upside blowout in the costs of existing policies or any new policy decisions would risk pushing the budget position back into deficit,” it says.
While agreeing that Australia’s economic outlook is positive, it believes the Government – and the Reserve Bank – has erred on the optimistic side, with nominal GDP growth forecast to be 6.25% in 2011-12, an upgrade from 5.75% in November last year.
Nonetheless, CommBank chief economist Michael Blythe welcomed the Government’s focus on the labour force.
“Measures focusing on increasing skilled migration, educating the workforce, improving the welfare-to-work trade-off and boosting infrastructure are all positives for the longer-run economic picture,” Blythe said last night.
ANZ says the budget continues successive Australian governments’ “broad commitment to sound fiscal discipline” by reaffirming Treasurer Wayne Swan’s promise to bring the budget to surplus by 2012-13, despite announcing the deficit had reached almost $50 billion last night.
But the ANZ team says a challenge remains to improve the structural position of Australia’s fiscal accounts in case the terms of trade weaken more substantially. “This budget takes some useful steps in this direction in spite of the Government’s minority status, but is likely to be criticised for not going far enough,” the bank says.
Nonetheless, ANZ says the economic assumptions for 2011-12 – of 4% growth in gross domestic product – appear reasonable. It applauds the Government’s ongoing commitment to cap real spending at 2% above inflation, but was less pleased with the decision to let real spending back to 1.9% per annum once the budget returns to surplus from 2013-14.
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