The tougher the May 16 budget, the longer interest rates will remain low faced with an economy that looks set to grow below trend for a while yet.
Prime Minister Tony Abbott is offering the prospect of personal tax cuts before the end of the decade – if changes to the budget are made now.
But he concedes there won’t be many people without a grumble when the government hands down its first budget on May 13.
“The budget pain will be temporary but the economic improvement will be permanent,” he told the Sydney Institute on Monday.
The tougher the decisions Treasurer Joe Hockey makes, the more likely interest rates will also stay low for longer.
The International Monetary Fund has sent a timely reminder that Australian economic growth isn’t too flash and will struggle to grow at a pace to relieve pressure on the unemployment rate.
Like the IMF, prominent economist Chris Richardson expects the economy to grow below its long-term trend rate of just over three per cent both this year and most of 2015.
“The tougher the budget … the less likely the Reserve Bank is to be raising interest rates any time soon,” the Deloitte Access Economics partner said.
He’s not surprised by reports the government is considering a levy on high-income earners to get the budget back on a more sustainable footing.
While the levy is likely to be temporary, Mr Richardson doubts the government will be able to guarantee that given its budget task.
He also believes a levy would have to kick in earlier than those earning $180,000 and above.
At that point, a levy of half-a-percentage point would raise $300 million compared to the $750 million that could be raised if it kicked in at $80,000.
Business Council of Australia chief executive Jennifer Westacott said a levy was not the solution to the fiscal challenge and would let the government off the hook from taking structural steps needed to fix the budget properly.
The “debt and deficit tax” – labelled a “deceit tax” by Labor – is being flagged along with an increase in the pension age to 70 from 2029, and co-payments for visits to the doctor.
The National Australia Bank’s global head of research Peter Jolly believes it’s “very sensible stuff”.
But from the perspective of the financial markets the key would be the extent of fiscal tightening during the next few years.
A survey by the Commonwealth Bank found just over a third of medium-sized firms expect the budget will have a positive impact on business, while a slightly larger 37 per cent predict no impact at all.
The more immediate focus will be on the release of the commission of audit’s findings on Thursday.
The report makes 86 recommendations, but the government will not be accepting them all.
Some will be actioned in the budget, others will require further consideration and some will be rejected altogether.