Australia: Slightly expansionary budget laying ground for possible RBA hikes

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Alicia García Herrero (Natixis) | Australia’s FY2023-24 budget was slightly expansionary supported by an improved fiscal position. The underlying cash balance for FY2022-23 is expected to be a small surplus (+0.2% of GDP), the first surplus in fifteen years. Revenues expanded by +8.8% on the back of higher commodity prices and larger personal income tax from the resilient labor market.

On the back of surging inflation, the Labor Government has launched various measures to alleviate rising cost of living. For example, cost-of-living support of AUD 14.6 billion (0.7% of GDP) will be provided to low- to medium-income households over the four years. Furthermore, the government will initiate the energy price relief program amounting to AUD 3 billion (0.1% of GDP) to support households and small business, which was decided last December.

Regarding health care, the government will invest AUD 3.5 billion (0.2% of GDP) over the next five years to improve access to medical services. The aged care services will also be expanded, including the minimum wages for its workers raised by 15%.

With the residential market remaining tight, measures to increase housing affordability were also announced. The eligibility on the First Home Owner Grant was expanded. For renters, the maximum rate of Rent Assistance will increase by 15%.

With rising geopolitical tension in the Indo-Pacific region, the government increased defence spending by 14%. Because purchases of nuclear submarines through AUKUS, the trilateral partnership with the US and the UK, are largely excluded, the actual expenditure on national security is increasing much faster than 14%.

Yesterday’s announcement of slightly expansionary budget could potentially induce the Reserve Bank of Australia (RBA) to hike again in August to 4.1%, especially if inflation remains high. For sure, surging inflation has been hurting consumers by reducing their purchasing power. However, the labour market has been resilient with the unemployment rate close to its historically lowest level. Furthermore, the housing market remains resilient with a very low vacancy rate.

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