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While the decisions within the budget lean towards a loosening in policy, they are believed to only marginally affect the Reserve Bank of Australia’s challenge in returning inflation to target.
Presumably, these measures will not have a substantial effect on the trajectory of inflation and monetary policy, nor on the growth outlook, according to preliminary evaluations.
The expected pattern of economic forecasts aligns closely with Treasury projections. GDP growth is anticipated to hover around 2% in 2024/25 and 2.3% in 2025-26.
However, there is concern over the very short-term outlook, with some variation in forecasts. Labour market projections also mirror Treasury’s outlook, with unemployment expected to peak around 4½% by mid-2024.
One noteworthy aspect of the Budget forecasts is the projected improvement in inflation rates. Headline inflation is forecasted to reach 2.75% by mid-2025, driven largely by the impact of energy and rent subsidies.
However, it should be noted that the Reserve Bank of Australia is likely to overlook this effect when setting monetary policy.
Despite the fiscal deterioration projected in the budget, interest rates will likely remain unchanged until late this year.
They argue that the current fiscal stance does not warrant a shift in the rate outlook.
The significant budget announcements, in line with media reporting over recent days, indicate a more interventionist strategy aimed at boosting growth in critical areas and alleviating cost-of-living pressures.
Key headlines include the Future Made in Australia program and the extension of the small business instant asset write-off applicable to around 4 million businesses.
Cost of living relief is expected through energy bill relief packages and a rental assistance package, alongside large spending programs on funding wage increases in aged-care and childcare sectors.
The budget surplus of around $9.3bn in 2023-24 is forecasted to shift to deficits of around $28.3bn in 2024-25 and nearer $43bn in 2025-26, largely due to added spending in these areas and the drag from lower commodity prices and a weaker labour market.
Overall, while the budget is expected to see a small structural deterioration over the next few years, the government’s parameter estimates suggest that most of the deterioration in the budget position is from new expenditures.
Despite this, Australia’s debt position remains low by international standards.
Read about Australia and the workforce trend: Flexibility Reigns: Australia and New Zealand Aligned with Global Workforce Trends
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