After the 2021 Federal Budget I said fiscal policy was back. At the time, I suggested you couldn’t ask fiscal or monetary policy to be doing any more to break the secular stagnation shackles that had beset Australia for a decade before the pandemic.
With unemployment at 4 per cent and inflation and investment intensions rising, policy has done a great job to break those shackles. Policy has taken Australia out of the secular stagnation era.
Policy now needs to cement those gains.
As such, the task over the next year will be to manage the transition to more sustainable economy, through what will be a challenging tightening of policy.
Based on what is in this budget, that policy effort to restrain the economy is falling largely to monetary policy. The context of course is monetary policy is so far yet to really start reversing the easing seen through the pandemic.
This budget shows only a $A1.8 billion improvement in the budget balance over the coming year. Spending is 27.8 per cent of gross domestic product - second only to last year’s 31.6 per cent of GDP record. The economic forecasts are on the conservative side, suggesting additional spending could even be forthcoming after the election.
Fiscal policy is working hard to ensure the economy is going to stay strong, and once the Reserve Bank of Australia starts to tighten, it will need to move quite some way to ensure inflation remains consistent within its target band.
ANZ Research expects the RBA cash rate to reach 2.0 per cent by the end of 2022. The RBA will also, of course, want to ensure it doesn’t overtighten. This is going to be a fine balancing act.
It must be said this is a budget delivered under challenging conditions. It comes during a once-in-a-century pandemic, perhaps the most substantial European conflict in 80 years boosting energy prices, a domestic inflation cycle of the sort we haven’t seen in at least 15 years, and with an election in less than two months. Those elements all seem to have influenced the budget.
In the detail of the budget you can see some of that context. Cost of living pressures are reflected in tax cuts and fuel excise cuts. There are efforts to improve women’s participation in the labour market and the quality of the roles they take. And there are some measures to help address the climate challenge.
The commentary around this budget is likely to revolve around how much it sustains the economy’s strength in the short term.
With the economy virtually at full employment the routes to economic prosperity in the medium-term centre around raising productivity and raising participation. They are sure to return as a policy focus soon.
Richard Yetsenga is Chief Economist at ANZ
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