RBA Likely To Continue To See Fiscal Policy As Neutral After MYEFO

The government has published its Mid-Year Economic and Fiscal Outlook (MYEFO) and as expected the budget and debt ratio projections improved compared with May’s budget. A surplus is not yet forecast for this financial year with a small deficit of $1.1bn projected (a $12.8bn improvement) but that is a negligible share of the economy. Today’s announcement was not a mini budget but an update on the position of Australia’s government finances. The MYEFO shouldn’t change the RBA’s view that fiscal policy is currently not inflationary.

• Treasury still expects inflation to return to target in FY25, but its forecasts remain considerably below the RBA’s at 2.75% compared with 3.3%. FY24 has been revised up 0.5pp to 3.75% due to higher oil prices.
• FY24 growth has been revised up 0.25pp to 1.75%, as stronger public demand, net exports and dwelling investment offset weaker consumption, with the outer years unchanged. GDP forecasts are in line with the RBA’s.
• 92% of the additional revenue has been put towards budget repair in the MYEFO and 88% since the government came to office. The deficit though is expected to widen to 1.2% of GDP in FY26 but the total to FY27 is now almost $40bn lower than the May estimate. Policy decisions have not added much to the FY24 deficit but the aggregate to FY27 is up around $5.3bn to over $25bn.
• Treasury’s commodity price forecasts remain conservative with iron ore assumed to decline to $60/t, metallurgical coal at $140/t and thermal coal $70/t.
• Gross debt is now expected to peak at 35.4% in FY28 revised down from 36.5%.
• Migration forecasts have been revised up 60k in FY34 to 375k but still significantly lower than FY23’s 510k. FY25 is down 10k to 250k as the government’s new measures become effective.