Via Bill Evans at Westpac:
In previous years the Reserve Bank has generally observed that fiscal policy has had only a very limited bearing on monetary policy decisions.
It is reasonable to contemplate whether 2019 will be different.
Firstly, if we take the expected approach from the Budget (an expansionary budget with a focus on supporting households) then the Reserve Bank will be much more interested than in previous years.
We have estimated (see Federal Budget preview) that the government will have around $3bn to allocate before June 30; and $5bn in 2019/20. In addition there will be the $2.5bn in 2019/20 which was earmarked in MYEFO as “allocated but not announced”.
Taken together, $10.5bn represents 0.8% of households’ annual disposable income or around 1.0% of annual consumer spending. By way of context, ‘trend’ consumer spending is around 2.8% a year, or 0.7% per quarter, while in 2018 it grew by only 2.0%. In this analysis, we assume that of any boost to household income half is saved and half is spent.
We can speculate as to how the new policy measures may be delivered. If they all take the form of direct payments impacting in a single quarter, then this represents a sizeable injection. If for instance, the $3bn was paid in direct one-off payments to households in late 2018/19 (say end June) and the additional $7.5bn was also paid as direct payments in early 2019/20 (say July) there would be an immediate cumulative injection of $10.5bn, representing 3.5% of quarterly disposable income or 4% of quarterly consumer spending. On the basis that, say, half the payments were saved then total consumer spending could be expected to lift by around 2.7% in the quarter, well in excess of the “trend” of around 0.7%.
If instead the new policy measures are delivered as a more staggered mix of payments and tax cuts then the impact may be less dramatic. For instance, if the $3bn was paid as a lump sum (1.14% of quarterly consumption) in, say, June 2019 then consumer spending could lift by an additional 0.57% in the June quarter on the basis of saving half the payment.
If the additional $7.5bn was allocated to a tax cut which was spread over the year then disposable income growth would be boosted by 0.6% over the year and consumer spending (spend half the tax cut) would be boosted by 0.35%.
In addition to the $10.5bn we have identified above, we have to consider the $4.1bn which is estimated to be received by households in extra tax rebates (as set out in the 2018 Budget). However, the economic impact is unclear as this 2018 Budget initiative was fully funded by measures cracking down on the “black economy”. It may be that timing issues mean that, taken together, these new policies might give a one-off boost to spending.
However there are numerous complications to these calculations – suggesting that the ultimate impact on consumers and on the economy of the 2019 Federal Budget will be less than these estimates indicate.
Firstly it is highly unlikely that the government would budget for a $10.5bn “handout”. That is likely to be viewed as a lopsided approach. A mix of $3.0bn in “handouts” and $7.5bn in tax cuts, effective from July 1 2019, seems to be a more balanced approach.
A complication is around the effective timing of any new measures. It is uncertain as to whether new budget initiatives can be legislated before the election with both houses of Parliament only sitting for one day after the Budget announcement.
This full allocation of the $10.5bn to personal income tax cuts and cash payments looks extreme given the government’s need to consider other interest groups apart from households, including regional Australia and infrastructure and accelerated depreciation allowances to boost investment by small business.
From the perspective of GDP and employment this response in spending is also likely to have a substantial leakage through imports.
Then of course we have the election which is mooted in the press for May 11, or at the latest May 18.
The Opposition currently leads opinion polls convincingly.
If the Opposition chooses to support the Government’s tax cuts and handouts it may be possible to legislate before June 30. Delaying the handout to post June 30 would put the 2019/20 surplus in doubt (see our calculations in Federal Budget preview).
Alternatively, the Opposition may choose to only offer tax cuts which are funded by other taxes neutralising the net impact on incomes. Certainly their policies, if successfully implemented, could allow a revenue neutral tax cut, boosting their fiscal credentials or allowing more scope for other initiatives including health and education.
Our current timing for the RBA to move to an easing bias in May (before the election and before the impact of fiscal policy will be known) and a rate cut in August still seems to be the most likely scenario.
Any “bidding war” between the parties, particularly around oneoff payments, is likely to be seen by the RBA as a temporary “sugar hit” that will not generate sustained higher income growth.
Tax cuts may allow the RBA to be a little more confident about the income/consumption outlook but that will be after it adjusts its current views to a much more realistic and lower growth trajectory as has become apparent through 2018 H2 and 2019.
With so much uncertainty about the impact of fiscal policy and the negative forces around housing; rising savings rates; low inflation and softening global growth building over the next months the RBA is still likely to move in August particularly now that the move is fully priced in to markets.
Hmm, let me see, a little tax cut versus a giant drop in my net wealth. Will I buy that new car?