Welcome to the Aussie Debrief, my name is Su-Lin Ong and I’m the Chief Economist at RBC Capital Markets.
The Australian Treasurer delivered his third budget last night and there are three key themes we’d like to highlight in today’s edition.
The first is the shift in the fiscal strategy. Policy has been recalibrated for recovery, for much stronger growth and an aim for a very clear full unemployment. Fiscal policy is being set to run the economy harder.
Expenditure in last night’s budget was more than we had anticipated and there’s a raft of new spending measures and initiatives across a range of industries.
There is a bit of a pink tinge to this budget. Women’s economic security and health has been elevated but there are also multiple other measures. Individually they aren’t all that substantial and they’re not particularly bold or new but collectively there is a lot more spending over the next four years compared to the last budget update in December of last year.
So when we look across the next four years new policy decisions amount to a little above $90billion. Now some of these measures are really welcomed. We think some of them will help contribute to higher productivity and labor force participation. So we particularly liked the changes to the child care subsidies, the extension of investment incentives and tax concessions there as well as continued infrastructure spend. All of those, I think, will be helpful for growth medium term. But others will largely increase government expenditure as well as boost household consumption.
So this big spending budget is very much, as I said, about driving more growth and full employment. Fiscal austerity and any thoughts of budget tightening have well and truly been put to one side and I think from that perspective we’re always mindful that budgets are political documents and this one probably is being framed with a likely federal election in mind some time over the next 12 months.
The second theme is really a stronger fiscal position despite a lot more expenditure compared to our last set of forecasts from the government in December of last year. So the underlying budgetary position for 2020/21 is expected to be about $160billion and that’s almost a $40bn improvement from the last update.
Further improvements expected next financial year so for 21/22 the budget is expected to improve to about $106billion. Now the stronger starting point, that $160billion deficit for the current fiscal year is about in line with our own forecast, but the improvement next year is a little bit disappointing and that does reflect definitely the larger bounce of expenditure that were announced.
As a result the issuance task is expected to be around $130bn that is smaller than the $210 for the current year. But again it’s probably a little bit on the high side of expectations and there is some risk of market disappointment.
As a result we have opted to take profit on our paid 10 year Aussie swap spread against the US position we’ve had that on for some time now and it really does reflect possibly a slightly bigger funding task for the next fiscal year than the market had been anticipating.
And finally what are the implications from last night’s budget for the Reserve Bank? We think it sits very much with them being able to be able to pull back modestly from emergency settings. And for us this means ending the TFF at the end of June. Likely not rolling the three year target bond to the Nov 24s and possibly a QE3 plan towards the lower end of the $75bn-$100bn range.
I think what we’re seeing here is policy being recalibrated for recovery so emergency type measures are being withdrawn. Policy still remains very accommodative. We see I think with both fiscal policy and monetary policy increasing coordination, a very singular focus on a determination to get to full employment so there does appear to be some coordination on that front.
Fiscal policy is doing most of the lifting but monetary policy still has a role to play and will remain very accommodative in the years ahead.