The Government's Mid-Year Economic and Fiscal outlook (MYEFO) released this week has maintained a small $1 billion surplus for 2012-13. However, real GDP growth was revised down to 3.0 per cent from 3.25 per cent, reflecting slowing global growth and falling commodity prices.
In order to keep its surplus, the Government's savings measures include reducing the baby bonus rate from $5,000 to $3,000 for second and subsequent children as well as reduced funding for Green projects and its grants program. Other key measures include the phased introduction of monthly tax payments for large companies.
"The MYEFO reflects the need to restore the surplus in the face of a $4 billion 'hit' from a lower company and resource rent tax due to a sharper-than-expected fall in commodity prices," said Bill Evans, Chief Economist with Westpac Bank.
"From the perspective of monetary policy this new set of fiscal policies can only be seen as adding to the case for lower rates since it is contractionary policy," he said.
Michael Workman and Diana Mousina, economists with the Commonwealth Bank, said further cuts in interest rates were likely and could push the Australian dollar down, though any move would be temporary given the US central bank's desire to keep the US dollar relatively low through quantitative easing.
"From a general policy perspective, the mix of tighter fiscal policy and easier monetary policy has the best chance of gradually reducing the Australian dollar's value. A lower dollar would ease some of the problems faced by the non-resources traded sectors of the economy like tourism, importing-competing manufacturers and tertiary education," the economists said.
However, Workman expects the Australian dollar to maintain its range between $1.04 and $1.07 over coming months. "We've still got growth, some inflation and our interest rates are higher than other countries, so the Australian dollar will remain strong," he said.
Westpac Bank expects the Australian dollar to fall to $1.01 in December, reflecting the downward movement in rates. However, the bank expects a rebound in the currency to between $1.05 and $1.06 in the first half of 2013.
The Australian dollar has dipped over the past month, from a high of $1.06 in mid-September to $1.02 in recent days following the central bank's cut in official interest rates to 3.25 per cent from 3.5 per cent in early October. It received a small boost from this week's higher-than-expected inflation numbers.
