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Australia & New Zealand Weekly: Will the Federal Budget Impact Monetary Policy?

Week beginning 1 April 2019

  • Will the Federal Budget impact Monetary Policy?
  • RBA policy decision.
  • Australia: Federal budget, retail sales, dwelling prices and approvals, trade balance.
  • NZ: Survey of Business Opinion.
  • China: Caixin PMI’s.
  • Europe: ECB minutes, unemployment rate, retail sales.
  • US: non–farm payrolls, retail sales, ISM’s.
  • Key economic & financial forecasts.

Information contained in this report current as at 29 March 2019.

Will the Federal Budget Impact Monetary Policy?

The Reserve Bank Board meets next week on April 2. Unusually, this meeting will be on the same day as the announcement of the Federal Budget at 7:30 pm on that evening. As such, we would expect that the Governor’s Statement will be fairly low key with little change from the sentiment we saw in the March meeting. As discussed, Westpac is anticipating that following the May meeting, the RBA will move to a clear easing bias, which will be justified by downward revisions in the growth forecasts. However, it is unlikely that there will be any hints of this action in the April Governor’s Statement. In the note below, we speculate on the implications of the Federal Budget for monetary policy.

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In previous years the Reserve Bank has generally observed that fiscal policy has had only a very limited bearing on monetary policy decisions. It is reasonable to contemplate whether 2019 will be different.

Firstly, if we take the expected approach from the Budget (an expansionary budget with a focus on supporting households) then the Reserve Bank will be much more interested than in previous years.

We have estimated (see Federal Budget preview) that the government will have around $3bn to allocate before June 30; and $5bn in 2019/20. In addition there will be the $2.5bn in 2019/20 which was earmarked in MYEFO as “allocated but not announced”.

Taken together, $10.5bn represents 0.8% of households’ annual disposable income or around 1.0% of annual consumer spending. By way of context, ‘trend’ consumer spending is around 2.8% a year, or 0.7% per quarter, while in 2018 it grew by only 2.0%. In this analysis, we assume that of any boost to household income half is saved and half is spent.

We can speculate as to how the new policy measures may be delivered. If they all take the form of direct payments impacting in a single quarter, then this represents a sizeable injection. If for instance, the $3bn was paid in direct one–off payments to households in late 2018/19 (say end June) and the additional $7.5bn was also paid as direct payments in early 2019/20 (say July) there would be an immediate cumulative injection of $10.5bn, representing 3.5% of quarterly disposable income or 4% of quarterly consumer spending. On the basis that, say, half the payments were saved then total consumer spending could be expected to lift by around 2.7% in the quarter, well in excess of the “trend” of around 0.7%.

If instead the new policy measures are delivered as a more staggered mix of payments and tax cuts then the impact may be less dramatic. For instance, if the $3bn was paid as a lump sum (1.14% of quarterly consumption) in, say, June 2019 then consumer spending could lift by an additional 0.57% in the June quarter on the basis of saving half the payment.

If the additional $7.5bn was allocated to a tax cut which was spread over the year then disposable income growth would be boosted by 0.6% over the year and consumer spending (spend half the tax cut) would be boosted by 0.35%.

In addition to the $10.5bn we have identified above, we have to consider the $4.1bn which is estimated to be received by households in extra tax rebates (as set out in the 2018 Budget). However, the economic impact is unclear as this 2018 Budget initiative was fully funded by measures cracking down on the “black economy”. It may be that timing issues mean that, taken together, these new policies might give a one–off boost to spending.

However there are numerous complications to these calculations – suggesting that the ultimate impact on consumers and on the economy of the 2019 Federal Budget will be less than these estimates indicate.

Firstly it is highly unlikely that the government would budget for a $10.5bn “handout”. That is l