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 said the federal budget will have minimal impact in the next financial year because most of the spending cuts and changes only start to take effect later. Deutsche Bank economists called it a small step toward structural tightening but noted it doesn’t start for a full year.
Most economists think the budget is only a modest step and more action is needed to return to surplus. Barclays chief economist Kieran Davies said the government needs a more concerted effort to get back to surplus given the likely end of the mining investment boom and weaker commodity prices.
Bank economists described the budget as cautious. National Australia Bank called it a "fairly timid initial approach" consistent with a soft economy, Deutsche Bank saw only a small structural move, and HSBC said the steps toward fiscal consolidation were modest.
According to NAB economists, nearly all the heavy lifting is coming from the revenue side of the budget, and most of those revenue measures are scheduled in the out years rather than delivering immediate savings.
Economists were doubtful the budget would materially change the Reserve Bank’s outlook. Kieran Davies suggested it probably won’t alter the RBA’s view and that the central bank is likely to keep interest rates lower for longer. HSBC also said the modest fiscal consolidation makes it less likely the central bank would see the budget as a drag on growth.
Financial markets were pricing in about a 17% chance that the Reserve Bank would cut the cash rate in June for a second consecutive month, and they also saw a chance of at least one more cut by the end of the year.
In this context, structural tightening means budget measures aimed at reducing the underlying deficit over time. Economists said the budget takes a small step down that path, but the measures are modest and mostly scheduled for later years, so immediate effects on growth are limited.
Investors should note the budget is seen as a cautious, modest step toward fiscal repair with limited near‑term impact. Expect the Reserve Bank to keep rates lower for longer unless stronger fiscal consolidation arrives, and watch broader factors—like the end of the mining investment boom and commodity prices—that economists say will influence Australia’s fiscal outlook.
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