RBA’s Response To Budget To Be Watched Closely

Treasurer Chalmers brought down the FY25 budget on Tuesday and as expected it showed a $9.3bn surplus for FY24 but deeper deficits over the forecast horizon as spending as a share of the economy rises. The signature programmes are cost-of-living relief worth $7.8bn which is aimed at bringing down inflation and $22.7bn for Future Made in Australia industry subsidies. Many don’t agree that the budget is disinflationary and the RBA’s response will be followed closely given the additional $20bn in the economy from policy decisions.

• Treasury’s Q2 2024 CPI forecast was revised down 0.25pp to 3.5% while Q2 2025 was unchanged at 2.75% but Q2 2026 revised up 0.25pp to 2.75%. Despite unchanged 2025, the government estimates that the energy and rent relief will “directly reduce” headline inflation by 0.5pp in FY25. As a result, headline could be back in the RBA’s band by end-2024. The RBA is forecasting 3.8% for Q2 and Q4 2024.
• Growth was left unchanged at 1.75% for FY24, as weaker consumption and dwelling investment were offset by stronger business capex and public demand. GDP was revised down 0.25pp to 2% for FY25 and up 0.25pp to 2.25% for FY26.
• FY25 is now expected to show a deficit of $28.3bn or 1% of GDP up from $18.8bn or 0.7% in the MYEFO. FY26 is now a deficit of $42.8bn or 1.5% of GDP up from $35.1bn or 1.2%. This is reflected in the receipts as a share of the economy little changed despite tax cuts but expenditure has been revised up 0.4pp to 26.4% in FY25 and 0.5pp to 26.6% in FY26.
• FY25 gross debt has been revised down 0.3pp to 33.9% after FY24 was also revised down 0.3pp. Subsequent years are little changed from the MYEFO.
• Cost-of-living relief includes $3.5bn for energy with $300 paid to households over four quarters starting Q3 and $1.9bn in rent assistance. The next election is due by May 2025.