OUTLOOK STILL FRAGILE
A modest easing in the fiscal trajectory can be defended given the still-fragile growth outlook. Tighter fiscal policy further could damage fragile household confidence and hinder the economic recovery.
Confidence has been volatile in the lead-up to the Budget and given the importance of consumer spending to the recovery in the non-mining economy, the Government has likely been keen to avoid a shock to confidence of the sort seen after the 2013-14 Budget.
This is particularly the case when interest rates are at record lows and monetary policy’s ability to generate growth and inflation is more questionable than ever.
This expansionary approach is reflected in higher spending (now projected to grow at an average annual rate of 4.3 per cent over the three years to 2018-19 compared with 4.1 per cent in the MYEFO).
This will be partly offset by higher receipts, which have been boosted by higher commodity prices as well as policy changes.
As a result of the slightly larger projected budget deficits, the net debt profile has been revised higher (to peak at 19.2 per cent of GDP in 2017-18), although not enough to put Australia’s AAA credit rating at meaningful risk.
Both Moody’s and S&P have given the budget a pass mark, although the pressure to deliver a more sustainable fiscal platform remains.