12 May 2015
Australian budget preview - Capital Economics
FXStreet (Bali) - According to Paul Dales, Chief Econonist Australia/NZ at Capital Economics, failure to provide any extra support to the economy in today's Australian budget will be disappointing, and may lead the RBA to cut interest rates further.
Key Quotes
"While Tuesday’s Federal Budget may well live up to the “dull” label slapped on it by the Prime Minister, the failure to provide any extra support to the economy will be disappointing. This would place an even greater burden on the Reserve Bank of Australia (RBA) to cut interest rates further."
"What’s more, we think the cash deficit will remain further away from balance for longer than the Treasury expects, which would put more downward pressure on the Australian dollar."
"Treasurer, Joe Hockey, is stuck between a rock and a hard place. He wants to regain some of the popularity lost after last year’s Budget was deemed “unfair”, but his hands are tied by the likelihood that any easing of the fiscal squeeze will bring Australia’s AAA credit rating into the firing line."
"The result will be a Budget light on measures, with a few small spending policies being funded by a few small revenue-raising policies, but heavy on politically palatable buzz words such as “integrity”. With the economy crying out for a helping hand, we would view this as a missed opportunity to ease the projected fiscal squeeze and take some of the burden off the RBA."
"Although the projected narrowing in the structural deficit (that part of the deficit unaffected by the performance of the economy) will probably be unchanged, the weaker economic outlook should force Hockey to admit that the cyclical and overall cash deficit in future years will be a bit larger than he forecast in December’s Mid-Year Economic and Fiscal Outlook (MYEFO)."
"We anticipate that the Budget will reveal that the cash deficit is expected to narrow from around $35bn in the current 2014/15 financial year to around $14bn in 2017/18, somewhat higher than the $11bn published in the MYEFO. The Budget may also show that by 2017/18 the ratio of net debt to GDP will have risen to 18.5%. That would be higher than the previous estimate of 17.0%."
"There are two reasons why the reality is likely to be even worse. First, the figures published in the Budget will assume that the policies currently stuck in the Senate will eventually make it into law. If they don’t then the structural deficit could be $27bn higher by 2017/18."
"Second, the Budget projections will be based on economic forecasts that look too optimistic. Whereas the Treasurer will probably expect GDP growth to accelerate from 2.4% in 2014/15 to around 2.75% in 2015/16, we think growth will actually slow to 1.7%."
"If so, then by 2017/18 the cash deficit will still be close to $30bn and the debt to GDP ratio will have risen to 20%. The initial market reaction to the Budget will probably be small. But if our more downbeat fiscal forecasts prove correct, then the downward pressure on the Australian dollar will only grow."
Key Quotes
"While Tuesday’s Federal Budget may well live up to the “dull” label slapped on it by the Prime Minister, the failure to provide any extra support to the economy will be disappointing. This would place an even greater burden on the Reserve Bank of Australia (RBA) to cut interest rates further."
"What’s more, we think the cash deficit will remain further away from balance for longer than the Treasury expects, which would put more downward pressure on the Australian dollar."
"Treasurer, Joe Hockey, is stuck between a rock and a hard place. He wants to regain some of the popularity lost after last year’s Budget was deemed “unfair”, but his hands are tied by the likelihood that any easing of the fiscal squeeze will bring Australia’s AAA credit rating into the firing line."
"The result will be a Budget light on measures, with a few small spending policies being funded by a few small revenue-raising policies, but heavy on politically palatable buzz words such as “integrity”. With the economy crying out for a helping hand, we would view this as a missed opportunity to ease the projected fiscal squeeze and take some of the burden off the RBA."
"Although the projected narrowing in the structural deficit (that part of the deficit unaffected by the performance of the economy) will probably be unchanged, the weaker economic outlook should force Hockey to admit that the cyclical and overall cash deficit in future years will be a bit larger than he forecast in December’s Mid-Year Economic and Fiscal Outlook (MYEFO)."
"We anticipate that the Budget will reveal that the cash deficit is expected to narrow from around $35bn in the current 2014/15 financial year to around $14bn in 2017/18, somewhat higher than the $11bn published in the MYEFO. The Budget may also show that by 2017/18 the ratio of net debt to GDP will have risen to 18.5%. That would be higher than the previous estimate of 17.0%."
"There are two reasons why the reality is likely to be even worse. First, the figures published in the Budget will assume that the policies currently stuck in the Senate will eventually make it into law. If they don’t then the structural deficit could be $27bn higher by 2017/18."
"Second, the Budget projections will be based on economic forecasts that look too optimistic. Whereas the Treasurer will probably expect GDP growth to accelerate from 2.4% in 2014/15 to around 2.75% in 2015/16, we think growth will actually slow to 1.7%."
"If so, then by 2017/18 the cash deficit will still be close to $30bn and the debt to GDP ratio will have risen to 20%. The initial market reaction to the Budget will probably be small. But if our more downbeat fiscal forecasts prove correct, then the downward pressure on the Australian dollar will only grow."