Finance Finance News Chances of rate hike ease

Chances of rate hike ease

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An interest rate hike has become less likely for later this year as the government’s budget measures dampen economic growth.

Some market forecasters were predicting before Tuesday’s budget that the Reserve Bank will increase the cash rate by Christmas.

But in an effort to turn this year’s near $50 billion deficit into a surplus next decade, Treasurer Joe Hockey has slashed spending and introduced a debt levy for high income earners.

The Treasury has also forecast economic growth to fall to 2.5 per cent in 2014/15, from 2.75 per cent this year.

Deloitte Access Economics’ Chris Richardson said the money that the government is taking out of the economy could be offset by the RBA not increasing the cash rate until next year.

“So the first rate rise will not be this year, it will be next year sometime.”

“The government is trying to walk the fine line between repairing the budget on the one hand, without damaging an economy that is fragile on the other,” he said.

“So the first rate rise will not be this year, it will be next year sometime.”

News headlines about a “horror budget” will impact on consumer confidence, JP Morgan chief economist Stephen Walters said.

“Cuts into welfare and disability support pensions, tax rises and petrol going up are all probably pretty negative headlines tomorrow and over the next few days,” he said.

“So confidence takes a hit initially.”

However, company tax cuts and measures to get people back into employment would help business confidence, he said.

“There’s some productivity enhancing measures there but I think near term the reaction is going to be negative, and the government has already admitted that.”

ANZ economists expect the RBA won’t start raising the cash rate until early 2015 because of the budget’s moderate drag on economic growth, with more as the year goes on.

“The related potential impact on consumer and business confidence, has the potential to either delay the start of the RBA’s tightening cycle and/or make this tightening cycle less aggressive during 2015 than ANZ’s current forecasts,” ANZ said.

University of NSW head of economics Stephen Keen said the deficit, which is forecast to hit nearly $50 billion next financial year, was quite small.

As a result, the government should not be obsessed with getting a small surplus.

“A small deficit is a sensible thing in a growing economy, and they’re going for a small surplus instead which will drive the economy down,” he said.

Calls for tax cuts

Accountants have also welcomed the cuts to spending, but say more needed to be done to lift revenues.

“The government has attempted to tackle half of our budget problem: expenditure, without committing to a timeline in which to address the other crucial half of the equation: revenue,” The Tax Institute board member Tim Neilson said.

But he welcomed a 1.5 per cent cut in the company tax rate, to take effect from July 1, 2015, saying it would reduce the government’s reliance on company revenues.

“It will also reduce the incentive for profit shifting out of Australia, allowing us to retain a greater share of the profits generated here in Australia,” Mr Neilson said.

Accounting giant PwC said the government now needed to consider all options to boost revenue from GST to mining tax.

The institute of Chartered Accountants Australia said a two per cent levy on those earning more than $180,000 had the potential to hurt the economy, while raising relatively little money.

“The debt levy could negatively impact consumer spending, hurt unincorporated small businesses and puts Australia’s top marginal tax rate amongst the highest in the world,” chief executive officer Lee White said.