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LUCI’S CALL: Budget won’t knock RBA off track

07:00am May 15 2024

With this year's federal budget, the government has had to tread a fine line between offering some relief to squeezed households in a way that doesn’t further stoke inflation. 

The cost-of-living crisis is real. Households are hurting and pulling back on their spending. The government is trying to address that with measures such as increased rent assistance, cheaper energy bills, and increased subsidies for many medications.

All of those things will reduce measured inflation by the end of the year and hopefully further reduce inflation of prices that are indexed.

But the government is also introducing additional spending measures, including on housing infrastructure and the care sector, that could boost demand with the potential risk of keeping inflation higher than it otherwise would be.

Most of this will probably be a wash in terms of the Reserve Bank's decisions and we still expect them to be able to start cutting the cash rate from about November this year.

As we get to that lower inflation world, the government will also need to address some of the medium term challenges to the budget.

We won't have the same kind of pleasant revenue surprises with high inflation and high commodity prices that the government enjoyed last year when it ran a surplus, and with an aging population and higher spending on the NDIS, cost control will be needed in other areas.

The previous two years ended up as being surpluses, even though government at the time of their budgets had forecast a deficit. It may well be that the deficit they're expecting for the fiscal year 2024/25 turns out to be a surplus once again, although we think it's less likely this time because some of the positives that we saw in previous years, like more tax revenue because of bracket creep, won't be in play this time around.

The stage three tax cuts which kick in on July 1 actually remove some of that bracket creep. There's also no guarantee that commodity prices will remain as buoyant as they have.

For further analysis on the budget from the Westpac economics team, visit WestpacIQ

Luci Ellis is Westpac’s economic spokesperson and is responsible for all of our economic research. She was previously Assistant Governor (Economic) at the Reserve Bank of Australia from December 2016 until October 2023. Prior to that, Luci was Head of Financial Stability Department at the RBA for eight years, spent two years on secondment at the Bank for International Settlements in Basel, Switzerland, and held several other senior positions at the RBA over a three-decade career in central banking. Luci has been a member of the Australian Statistics Advisory Council, the statutory advisory body to the Australian Bureau of Statistics, since November 2015. Luci holds a PhD from the University of New South Wales, a Masters in Economics degree from the Australian National University and a first-class Bachelor of Commerce (Honours) degree from the University of Melbourne.

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