Daily Commentary BY THE CURVE TEAM –

Budget and RBA Announcements

7th of October, 2020

In a huge day of news, the government delivered a budget full of spending measures to support the economy and the RBA signalled its intent to do more.

Adding the tax cuts and spending measures, the government will run a cash deficit of 11% of GDP for 2020-21. Most of the measures announced last night were as expected given the pre announcement leaks to the media.

The measures include personal income tax cuts, business tax refunds, wage subsidies for hiring apprentices and young people on welfare as well as adding to infrastructure funding. The government expects that a surplus will not be achievable until 10 year’s time, which implies an accommodating fiscal policy for the economy for some time.

The underlying assumptions of the budget are optimistic. A vaccine is expected by mid 2021 and GDP is expected to reach pre-Covid levels by the second half of next year.

With these assumptions, the government hopes individuals and businesses will drive the recovery. Direct government spending, although features in the budget, is not the primary theme. Reducing tax and creating incentives to invest and hire people is the more hands off approach the government has taken.

Should confidence and the economy recover as the government expects, there will still be no guarantee people will spend more with their increased disposable income and that businesses will invest and hire with their increased cash flow and incentives.

Prior to the budget announcement yesterday, the RBA made no change to its current policy stance. However, they signalled that looser policy is still on the agenda.

The noteworthy shift in rhetoric was the RBA saying they view ‘the high rate of unemployment as an important national priority’. This follows the previous meeting where they noted a lower currency would support the economy and they once again said they continue ‘to consider how additional monetary easing could support jobs as the economy opens up further’.

Where early in the pandemic the RBA were content in not reaching inflation and unemployment targets, they appear less tolerant of missing these targets now.

Trade balance data for August was also released yesterday. In a continuation of the last two months, the surplus fell once again to $2.6 billion, which was much lower than the expected $5 billion.

Exports fell 4.2% off the back of a decline in gold exports. China exports and resource exports remained strong. Imports rose 2%, with car and oil rising strongly suggesting domestic demand is recovering.

Josh Stewart

Client Relationship Manager