Wayne Swan’s budget is being greeted with a yawn, yet spending cuts could stimulate further rate cuts.

Wayne Swan, named the world’s best finance minister two years ago by Euromoney, can’t win over the markets.

Analysts are dismissive of his latest budget in view of the prospects of Swan’s Labor Party retaining power after the September election. “For markets, we expect little response to (the) budget,” say Scott Haslem and George Tharenou of UBS.

“With current polling pointing to defeat at the next election, (Swan is) is unlikely to try to fully repair the budget near-term at the expense of re-election polices," they said. "We do not expect a significant net fiscal tightening in this budget.” 

Matt Sherwood, of fund managers Perpetual, reckons Swan’s fifth consecutive deficit since 2008 will be about $17 billion. That will mean that whoever wins the election may launch a mini budget in November with the prospect of large spending cuts across the economy.

For the stock market, spending cuts by any subsequent government will hit business confidence, resulting in depressing macroeconomic data and will likely force the Reserve Bank to cut its benchmark cash rate, currently 2.75 per cent, in an effort to stimulate economic activity, Sherwood says.

“Bigger (spending) cuts could hit confidence in late 2013 and this could force the Reserve Bank to make large rate cuts, especially if Chinese growth lessens,” says Sherwood. “This would only increase the interest rate differential between shares and term deposits and increase the relative attractiveness of industrial shares.”

At 11:24am AEST the S&P/ASX 200 Index was up 6.60938, or 0.1 per cent, to 5212.70.

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