Josh Frydenberg has tried to soothe concerns that spending in his fourth budget will inflame already heated inflation and bring forward an interest rate rise earlier than would otherwise be the case.

While the treasurer’s pre-election budget cut deficits by about $100 billion out to 2025/26, it also spends tens of billions of dollars, including $8.6 billion in cost-of-living measures for households.

This includes a halving in the 44.2 cents a litre fuel excise for six months.

“The reason why we took this step is because cost of living pressures are real, fuel prices are particularly high,” Mr Frydenberg told the National Press Club at the traditional post-budget lunch in Parliament House.

He said Treasury estimates a cut in the fuel excise will reduce inflation by 0.25 per cent.

Financial markets see the risk of an interest rate hike by the Reserve Bank of Australia as early as June, with economists expecting inflation to accelerate to at least five per cent compared with an already high rate of 3.5 per cent.

“This budget delivers further fiscal stimulus near term and, at the margin, it adds to the pressure for the RBA to begin policy normalisation sooner rather than later with emergency cash rate settings looking increasingly inappropriate,” RBC Capital Markets chief economist Su-Lin Ong said.

The markets are pricing in a cash rate of around 0.3 per cent by June, compared with the current record low of 0.1 per cent.

“It will be interesting to see how the Reserve Bank responds to this budget next Tuesday, when it meets to consider interest rates,” CPA Australia’s Jane Rennie said.

The budget also provides an additional tax break for low and middle income earners and a one-off payment to pensioners and the unemployed.

Committee for Economic Development of Australia chief economist Jarrod Ball said the short-term quick fixes would be welcomed by many.

“But … with growing inflationary pressures and interest rate rises on the horizon, cost-of-living pressures will not dissipate any time soon and these measures do not provide a long-term solution,” he said.

Labor will wave through the initiatives, at a time when real wages are going backwards.

“There is a role for cost of living relief in the budget,” shadow treasurer Jim Chalmers told ABC radio.

“What’s missing from the budget is a plan beyond May. This government is temperamentally incapable of seeing beyond the May election.”

Still, Standard & Poor’s said the improvement in the budget bottom line has been faster than previously anticipated, underpinning Australia’s AAA rating and stable outlook.

“The outcome would have been stronger had the government not announced additional spending in the budget to ease cost-of-living pressures,” S&P said.

Australia remains one of a small group of 11 countries to be rated AAA by S&P, a level it has held since 2003.

Moody’s Investors Service and Fitch Ratings rank Australia similarly.

Moody’s vice-president Martin Petch said the budget improvement reflected the flexibility of the Australian economy and the effectiveness of its macroeconomic policy response to the coronavirus pandemic.

“This, and unexpected strength in commodity prices, have driven a solid economic recovery and lift in government revenues,” he said.

But Fitch director for sovereign ratings Jeremy Zook said while the medium-term fiscal outlook has improved, the path for budget consolidation is highly reliant on forecasts of an improved economic outlook and revenue performance.

“It does leave fiscal metrics and debt stabilisation vulnerable to a potential underperformance in economic growth, especially as the budget does not expect a return to fiscal balance in the next 10 years,” he said.

 

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

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