The Australian budget was close to market expectations and the main aspect will be additional currency vulnerability if GDP growth rates fail to meet expectations.
In the budget statement, Australian Treasurer Morrison announced measures to boost infrastructure spending. The government is planning a second international airport for Sydney together with a substantial package for road and rail investment. The total spending commitment on capital projects amounted to A$75bn over the next ten years.
There was a new levy on big banks and higher misconduct fines for financial institutions while, in the personal sector, there were increased medical care levies.
The fiscal 2017/ 2018 budget deficit forecast was slightly higher than expected at A$29.4bn and compared with a previous forecast of A$28.7bn. The 2018/19 budget was aslo revised higher to A$21.4bn from A$19.7bn previously.
The government is aiming to return the budget to A$7.4bn surplus for 2020/21 following 12 consecutive annual deficits and compared with the A$1.1bn surplus forecast in the mid-year economic outlook.
The GDP growth forecast was 2.75% for fiscal 2017/18 with 3% growth in the following two years with support from an unwinding of weak investment trends seen in recent years. The CPI inflation rate was forecast at 2.0% and unemployment at 5.75% for 2017/18 with inflation expected to increase to 2.5% in 2020/21.
A key aspect will be the reaction of ratings agencies, especially as there have been persistent warnings that the inability to curb deficits could jeopardise the crucial AAA credit rating.
The government has been acutely aware of the warnings and has made the medium-term budget surplus forecast a strong focus in the budget.
There will inevitably be doubts whether the medium-term budget surplus will be achieved and the main concern is likely to be fears that stronger growth will not materialise. Weakness in growth, allied with increased spending commitments, would push the deficit sharply higher.
In this context, any signs of growth vulnerability would have a larger negative impact on sentiment surrounding the Australian dollar and increase the threat of a ratings downgrade.
AUD/USD edged higher to near 0.7350 from earlier 4-month lows near 0.7330 with 10-year yields above 2.70%.
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Dean Popplewell
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