Fiscal Splurge Offers Ballast to Australian Economy’s Soft Spots
Fiscal Splurge Offers Ballast to Australian Economy’s Soft Spots
(Bloomberg) --
The fiscal injection unveiled in Australia’s budget should help ease pressure on a central bank that’s facing calls to resume propping up a faltering economy.
Treasurer Josh Frydenberg announced tax relief worth A$158 billion over a decade for low- and middle-income earners and a A$100 billion infrastructure package on Tuesday.
While at heart a re-election strategy, the budget seeks to bolster two of the economy’s weakest pillars -- retrenching households and a construction industry at risk from a slumping property market. The key is how quickly the cash can be transferred given the speed of the slowdown in growth.
“There are genuine and clear risks emerging,” Frydenberg said in his speech to parliament in Canberra. “The residential housing market has cooled, credit growth has eased” in Australia, while China’s economy has slowed and Japan and Europe have seen “a loss of momentum.”
An almost 14 percent slump in Sydney house prices is cascading across the economy: prompting a sharp deceleration in consumption that accounts for almost 60 percent of GDP, and hurting construction. Economic growth slowed to an anemic 0.2 percent in the final three months of last year, with government spending key to staving off a negative result.
The property slump is set to shave yet more from growth, according to the budget papers. The documents sketched out “a plausible central estimate” that a 10 percent drop in housing prices could see real GDP “about half a percent lower” after two years. Sydney property has been in a downturn since mid- 2017.
Treasury forecast dwelling investment to fall 7 percent in fiscal 2020 and a further 4 percent the following year “as existing projects are completed.”
While the conservative government’s final budget before an election next month was short on vision and reform, it did present a response to the growth gaps that have opened up.
Just as the five-year residential property boom soaked up capacity as resources investment wound down, the coalition’s pledge to fund roads, rail and airports offers a further transition option for construction workers.
Reserve Bank Governor Philip Lowe, who held the cash rate at 1.5 percent for a 29th meeting earlier Tuesday, noted in his statement that consumption is being hit by “the protracted period of weakness in real household disposable income and the adjustment in housing markets.”
Money markets are pricing in at least one rate cut this year and possibly a second. The government’s proposed tax relief, offering a lump sum of up to A$1,080 could prove more effective than lower interest rates.
What Bloomberg’s Economists Say
Australia’s government unveiled plans to cut income and corporate taxes in fiscal 2020, while at the same time maintaining a commitment to fiscal consolidation by returning the budget to surplus. The support it lends to economic growth is yet another reason for the Reserve Bank of Australia to keep interest rates on hold this year, rather than cutting rates as financial markets expect.
-- Tamara Henderson, ASEAN, Australia and New Zealand economist
Click here to read the full report
Lowe will also be pleased with Frydenberg’s forecast return to surplus, having repeatedly warned that keeping the books in shape is an insurance policy that allows for a significant fiscal injection in the event of a crisis like 2008.
Frydenberg’s declaration that the budget is “back in the black and Australia is back on track,” is borrowed from conservative predecessor Peter Costello, who served as Treasurer under Prime Minister John Howard from 1996 to 2007. The tax cuts, he noted, were the biggest since the Howard government.
The key question now is how quickly they can be delivered -- if at all. Frydenberg won’t seek to legislate the cuts in the final sitting week of parliament before elections that the main opposition Labor party is favorite to win. And even if the Liberal-National coalition wins a third term, it may struggle to pass the tax relief through the Senate.
It may well fall to Lowe after all to do the heavy lifting.
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