When Treasurer Joe Hockey delivers his second Budget tomorrow night, his challenge will be to support growth while protecting against increasing debt, says HSBC.
According to an HSBC Global Research report titled Australian Budget Observer, the government will need to avoid past mistakes.
“The government will need to tread the fine line between short-term fiscal accommodation, which leads to larger budget deficits, and credible medium-term plans for eventual fiscal consolidation to help keep government debt on a sustainable path and to support business confidence,” the report said.
“The risk remains to the downside, as this is a tricky balancing act.
“Last year’s Budget was a contributor to the fall in business confidence, which has been a drag on business investment and hiring intentions.
“A repeat performance could see the RBA needing to cut rates further to support growth, although this could have an undesirable side effect of potentially leading to over-inflation of some asset prices,” the report stated.
HSBC said the Budget will be marred by the taxation black hole left as a result of falling commodity prices.
As a result, the government is expected to downgrade its nominal GDP forecasts for 2015/2016 from 4.5 per cent in the mid-year update to 3.5 per cent. Real GDP is expected to grow 2.75 per cent in 2015/2016.
HSBC indicated that the Budget deficit should remain the same in 2015/2016 as it was in 2014/2015, at around 2.4 per cent of GDP.
According to the report, larger deficits are sustainable for Australia in the near term as debt is low by international standards.
“Nonetheless, with government debt continuing to rise and an ageing population expected to put pressure on the Budget in coming years, the government needs to continue to set out credible medium-term consolidation plans to help to protect its triple-A sovereign rating,” the report said.
Report authors – HSBC chief economist of Australia and New Zealand Paul Bloxham and economist Daniel Smith – said that the upcoming Budget will have fewer new policy measures than previous editions.
HSBC expects policies to include tax cuts for small businesses, incentives to increase labour market participation, and a ‘families package’ to replace the childcare rebate.