RBA Clinging to Rates Ammo Sees Reprieve From Australia Tax Cuts

(Bloomberg) -- Australian lawmakers mired in red ink have looked to the central bank to tide over the economy for almost a decade. The roles are set to reverse.

With the central bank determined to preserve the last of its interest-rate ammunition at Tuesday’s meeting, as it has done since 2016, the spotlight turns to next week’s budget. The government has flagged personal tax cuts to support households saddled with record debt and stagnant wages, following a a revenue windfall unseen since the 2008 crisis.

There’s been “a humongous improvement in the budget,” said Chris Richardson, a director at Deloitte Access Economics, who sees the government maintaining its return to surplus by 2021. “The world economy is the best it’s been in years. And because some of that strength is in China, there’s also good news in commodity prices.”

That’s a relief for Reserve Bank of Australia Governor Philip Lowe. His economic growth forecasts -- to be updated Friday -- rely on decent levels of consumption, which has been constrained for the past three years. Australians maxed out the credit card as they used easy money to chase property prices ever higher; the hangover from that frenzy is well and truly settling in.

One factor that could boost the broader economy would be a declining currency, which has fallen about 7 percent since a January peak, buying 75.40 U.S. cents on Friday. But it would probably need to fall into the 60s for a sustained period -- potentially almost a year -- to change the RBA’s economic calculations. Traders are pricing in just a one-in-three chance of a rate cut in December.

In the meantime, consumption has been sustained by Aussies running down their savings. Households are now getting concerned about their financial circumstances and are unlikely to drain their accounts much further, meaning spending is set to be more closely aligned with income, says Commonwealth Bank of Australia.

“The risk is that the consumer is now less responsive to good economic news, and potentially more reactive on the downside,” said Michael Blythe, chief economist at Commonwealth, Australia’s biggest bank. “Consumers could scale back spending by more than normal in response to a ‘shock,’ accentuating any downturn.”

The May 8 budget could offer a helping hand. A “back-of-the-envelope” calculation by HSBC Holdings Plc shows that A$10 billion in tax cuts and spending plans could boost the economy by 0.6 percentage point of gross domestic product.

Deloitte’s Richardson, a former Treasury official, predicts tax revenue for the fiscal year though June 2018 will beat official forecasts released in December by A$7.6 billion, and by a further A$6.7 billion the following year. He forecasts an underlying cash deficit of A$16.6 billion in fiscal 2018.

Treasurer Scott Morrison said Thursday the budget will contain “targeted” and “measured” tax cuts for middle to lower income earners. The government also said it would dump a planned increased to the national health levy.

“The upside of the Australian government’s budget strategy is that consumers will be given a shot in the arm,” said Shane Oliver, chief economist at AMP Capital. “The downside is that we will still be seeing a record 12 years of budget deficits with nothing put aside for the next rainy day.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Malcolm Scott at mscott23@bloomberg.net, Chris Bourke

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