State and Federal budgets “entirely at odds” with Reserve Bank and risk adding to interest rate pressure

Governments are pumping an enormous amount of stimulus into Australia’s economy and risk driving up interest rates further, according to Deutsche Bank. About $50 billion will be added to activity in the 2024 financial year by State and Federal budget decisions — about 2 per cent of national output — the investment bank said in a research note on Monday. The figure is higher than any time in the past 25 years outside of the Global Financial Crisis and the COVID-19 recession, the note said. The extraordinary injection comes despite record low unemployment and an extended campaign by the Reserve Bank of Australia to fight inflation, which peaked above 8 per cent in 2022. It means governments are effectively hitting the accelerator at the same time the RBA is pushing the brakes. Deutsche Bank said the number “sits entirely at odds” with the RBA’s work to lift interest rates. “Fiscal policy working in the opposite direction to monetary policy only adds to the case for further hikes,” Deutsche Bank said as it flagged two more cash rate rises by December to take the official benchmark rate to 4.6 per cent. “For government net spending to be adding so much to aggregate demand would be notable at any point in the business cycle. “But in the current environment, it risks complicating the RBA’s contractionary monetary policy stance.” The bank said the impact may be reduced if high commodity prices continued to deliver revenue above expectations. At the Federal level, the Budget is expected to swing from a surplus in the 12 months to June to a $13.9b deficit in 2024 — adding about 1.4 percentage points of GDP in stimulus. The surprise surplus followed an enormous increase in revenue — about $100b — above the level forecast when the 2023 Budget was first handed down in March of that year, driven largely by higher than expected personal and company tax revenues. State governments were also adding to the problem. Their deficits would grow from 1.9 per cent of the economy in the 2023 financial year to be 2.5 per cent in the year ahead, Deutsche Bank said.