Interest rate pressure minimised for borrowers
As households and businesses continue to struggle with interest rate rises over the last year, this year’s Budget aims to minimise future rate rises while providing some support to voters. While there are still risks for further rate rises in the next six months, the Government has taken measures to minimise additional upward pressure on rates.
The Budget contains items to address cost-of-living tensions and reduce costs without directly putting additional cash into the hands of voters. Other tax tweaks, compliance policies and the natural increase in tax receipts are likely to more than offset these to neutralise the prospect of a significant surge in spending.
Perhaps the largest cash injections will be the increases to pay for aged care workers ($11.3 billion) and one-off energy price relief payments ($3 billion) offered to households and eligible small businesses to assist with cost-of-living pressure. Other key measures include changes to the single parent payments, increases to income support payments, rent assistance and additional assistance through Medicare. These all add up and create some additional inflationary stimulus, but on a smaller scale compared to offsetting measures.
The deficit has been significantly wound back, with initial estimates of $44 billion shrinking now to a small surplus of around $4 billion. This reduction in the deficit, primarily due to surging tax receipts (from individuals and businesses) will soak up this money and take it out of the economy. This brings the Budget back from being an expansionary one, to being (only slightly) contractionary – doing some of the work of the Reserve Bank of Australia (RBA).
This return to surplus and assistance from other repair measures, more than offsets the new key spending that could have influenced the inflation rate and required additional interest rate rises to mitigate. The RBA will breathe a sigh of relief as it will take off some pressure to lift rates as far as they might have expected.
While the Treasurer has claimed the cost-of-living assistance will shave 0.75% from the inflation figure, he has ignored the possibility that this saving won’t be spent elsewhere - which is a bold prediction. One positive however, is the merit in a targeted approach, as much of the assistance is in non-discretionary spending areas (e.g. energy, rent, medicine and doctor’s visits).
One area of interest is the policy to broaden the availability of the Government’s Home Guarantee Scheme. This is likely to allow more people to enter the housing market. While this will increase the number of applicants for the scheme, as the Government’s contribution is via a Guarantee rather than through cash subsidies or grants, there is arguably less pressure on house prices which should avoid contributing to inflation and higher interest rates.
BDO welcomes the Government’s budget as a balanced approach to repairing the economy without fuelling inflation and putting upward pressure on rates. Borrowers can largely feel grateful to the Government for not putting them under the spectre of even more interest rate rises.