More work to do, economists say
The budget is expected to have a minimal impact on the economy in the next financial year as most of its cuts will only kick in after that.
"This budget takes a small step down that road [of structural tightening], but ... it is too small and doesn't start for a full year from now," Deutsche Bank economists Adam Boyton and Phil O'Donaghoe said.
Barclays chief economist Kieran Davies said the government needed to make more of a concerted effort to bring the budget back to surplus in the next few years, given the imminent end of the mining investment boom and lower commodity prices.
National Australia Bank economists Alan Oster and Rob Brooker described the budget as a "fairly timid initial approach" to addressing the deficit that was more in line with a "soft economy".
"From a structural viewpoint nearly all of the heavy hitting is from the revenue side and most is done in the out years," they said.
Mr Davies said he doubted the budget would alter the Reserve Bank's outlook for the economy, with governor Glenn Stevens
likely to keep interest rates lower for longer.
HSBC chief economist Paul Bloxham said the modest steps towards fiscal consolidation meant the central bank was unlikely to claim it would be a drag on growth, possibly reducing the need for another rate cut.
Financial markets are pricing in a 17 per cent chance the Reserve Bank will reduce the cash rate in June for the second consecutive month, and a chance of at least one more cut by the end of this year.
Frequently Asked Questions about this Article…
Economists say the budget is a step in the right direction on structural problems but will have only a minimal impact on the economy in the next financial year. Most of the changes are scheduled to take effect later, so investors are unlikely to see immediate market-moving effects.
According to economists quoted in the article, most of the budget cuts don’t start for about a year and much of the ‘heavy hitting’ is in the out years, so the economic impact is expected to be delayed rather than immediate.
Economists in the article suggest the budget is unlikely to materially change the Reserve Bank’s outlook. Barclays’ chief economist doubted it would alter the RBA view, and HSBC’s chief economist said the modest fiscal steps make it unlikely the central bank would see the budget as a big drag on growth.
Financial markets were pricing in about a 17% chance of a June cash-rate cut at the time of the article, with a possibility of at least one more cut by the end of the year. Economists quoted expect the budget’s modest consolidation makes another cut less certain, not more.
Barclays’ chief economist said the government needs a more concerted effort to return the budget to surplus in the next few years. The article indicates the budget takes only a small initial step and much of the revenue improvement is scheduled for later years.
Deutsche Bank economists called it a small step toward structural tightening, while NAB economists described it as a 'fairly timid initial approach' more consistent with a soft economy. Overall, they noted most of the structural adjustment comes from revenue measures and in the out years.
The article highlights economists’ concern that the imminent end of the mining investment boom and lower commodity prices could reduce government revenue, reinforcing the need for stronger fiscal consolidation to avoid pressure on public finances.
Investors should monitor the timing and size of the budget’s revenue measures in the coming years, any shifts in commodity prices and mining investment, and signals from the Reserve Bank about interest-rate policy — all factors the economists in the article flagged as important to future economic and market conditions.
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