Budget and economy threat grows for election victor

While the budget is predicated on wages growing by 2.75 per cent in 2019-20 and then 3.25 per cent, the RBA predicts wages will rise by 2.5 per cent next year and then a modest 2.6 per cent in 2020-21.

Wages, and the personal income tax revenue they deliver, are vital to the budget bottom line, as is the terms of trade.

The RBA now expects the terms of trade will tumble by 8 per cent in the coming year, compared to the 5.25 per cent budget forecast.

The biggest hit is to household consumption, which accounts for more than half of all Australian economic activity.

Treasury predicted in April that household consumption would grow by 2.75 per cent next year and then 3 per cent in 2020-21. The RBA now anticipates growth of 2.4 per cent then 2.7 per cent.

The RBA forecasts include market pricing for changes in official interest rates. Markets believe the central bank will cut rates twice by May next year, taking the official cash rate to a record low of 1 per cent.


At risk are the budget surpluses that both the Coalition and Labor are forecasting.

The Coalition has pencilled in a surplus of $7.1 billion in 2019-20, followed by $11 billion in 2020-21. Labor’s election costings show it expects $7.4 billion and then $13.2 billion over the same two years.

But less-than-expected wages growth, cautious households and a revenue hit from the nation’s biggest exporters put both sets of figures at risk.

A fresh risk is the trade battle between the United States and China, which escalated at the weekend after President Donald Trump lifted to 25 per cent the tariffs on $US200 billion of imports from the world’s second largest economy.

Mr Trump is threatening to slap another $US300 billion worth of imports from China with 25 per cent tariffs. China, which last year responded to the initial tariffs imposed by President Trump by putting in place tariffs on American goods, has yet to retaliate.

In the April budget, Treasury said there was a real risk to the Australian economy if the US and China engaged in a trade war.

“Escalation of tensions would be expected to negatively affect growth in a number of countries, including in Australia’s major trading partners,” Treasury warned.

AMP Capital chief economist Shane Oliver said that in the short term there may be a boost to budget coffers because of higher iron prices caused by supply disruptions in Brazil.

But longer term, the RBA’s forecasts pointed to problems ahead for Saturday’s victor, particularly with household consumption expected to remain subdued.

“The wages downgrade is especially big,” he said.

“The RBA is clearly saying its going to take longer for unemployment to come down to a level to push up wages and inflation and that is a real issue for the budget.”

Treasurer Josh Frydenberg played down the differences between the budget’s forecasts and the RBA’s for overall economic growth.

“It’s only a quarter of a percentage point lower than what was in our budget,” he told Sky News on Sunday.

Shadow treasurer Chris Bowen said the forecasts pointed to underlying issues facing the economy.

“The RBA (is) downgrading economic growth, saying it’s going to take longer to get back to even lower unemployment, downgrading inflation, downgrading consumption,” he said.

“Just a few weeks after Josh Frydenberg brought down his budget, with the assumptions that underpin it, here we have the Reserve Bank in their Statement on Monetary Policy, saying it’s not quite as good as Josh Frydenberg told the Australian people.”

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

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