CBA predicts rate cuts still expected to go ahead in February despite whopping budget blowout

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CBA predicts rate cuts still expected to go ahead in February despite whopping budget blowout

The splurge in government spending is unlikely to impact the Reserve Bank forecasts, according to a major bank who has called for rate cuts in the new year.

Wednesday’s Mid-Year Economic and Fiscal

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(MYEFO) updates Australia’s budget

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and estimates that the underlying cash deficit will be $26.9 billion in the current financial year, compared to the $28.3bn forecast at the time of the May budget.

While there is an improvement over the short-term, forward estimates have been revised down by $21.8bn over the next four years.

Camera IconJim Chalmers says the budget blowout will be $21bn over the next four years. NewsWire / Martin Ollman. Credit: News Corp Australia

Commonwealth Bank’s chief economist Stephen Halmarick said despite the budget blowout, it is unlikely to have an impact on the RBA’s next rate decision.

“Our base case remains for the RBA to commence an easing cycle in February 2025 and we look for 100bp of easing over 2025 that would take the cash rate to 3.35 per cent,” Mr Halmarick said in a statement following the release of the MYEFO.

He said the bank’s forecast comes as Wednesday’s MYEFO

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shows estimated deficit remaining unchanged at 1.0 per cent in the 2024.2025 financial year before growing marginally higher to 1.6 per cent of GDP.

“That is, the additional fiscal policy easing embedded in the MYEFO is not large enough to have a meaningful impact on the broader economy, inflation and monetary policy,” Mr Halmarick said.

Deloitte Access Economics partner Stephen Smith said MYEFO shows the structural issues facing the budget that has previously been bailed out by windfalls in commodity prices.

“Since the early 2000s, cyclically serendipitous commodity price booms have papered over fiscal cracks, allowing governments to ignore a worsening structural deficit,” Mr Smith said.

“Today’s very weak private sector economy has revealed the extent of the issue, which would be worse but for Australia’s strong labour market and rapid population growth.”

Camera IconDespite larger than expected government spending it is unlikely to impact the RBA’s rate cutting cycle. NewsWire / Martin Ollman Credit: News Corp Australia

Deloitte Access Economics partner Cathryn Lee said the government deserves credit for saving most of the ‘unexpected’ revenue that flowed into federal coffers during the post-pandemic *******, although it points to the realities of a budget in structural deficit.

“Australia’s structural budget deficit is the result of years of successive governments neglecting the economic and tax reform needed to create a more prosperous Australia. Significant economic and tax reform is the only way to stabilise Australia’s fiscal position,” she said.

Unavoidable spending

*********** treasurer Jim Chalmers said the budget blowout is due to $8.8bn in “unavoidable spending” and $16.3bn in increases to government payments, like the age pension ($3.6bn), disability pension and payments ($3.6bn) and Job Seeker ($2.1bn) – with more people expected to be on income support over the next four years.

Payments to non-government schools are also forecast to grow by $2.1bn in the next four years, due to increasing enrolment numbers and schools increasing placements for students with disabilities “to attract a higher level of funding”.

Mr Chalmers said even with the additional costs, the budget has still improved by $200bn since the election, with Australia on track for its soft landing in the first half of 2025.

“Even with a little bit of slippage and some of the years, a $200bn turnaround since we were elected is the biggest nominal consolidation in the budget on record and we have managed to get the deficit for this year a little bit smaller,” he said.

“We have made room for pressures and for priorities with all of the savings that we have made, $92bn of them, by banking revenue, by showing spending restraints.”

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