Australian Economic Perspectives "Budget deficits beat slightly, but deb..."

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Australian Economic Perspectives "Budget deficits beat slightly, but deb..."

Total Government fiscal policy stimulatory: deficit in 25/26 of ~-4¾% of GDP

Overall, fiscal policy remains stimulatory. UBS estimate the broadest measure of the total

Government budget balance (including the Australian and State & Territory

Governments) 'expands' in 25/26 to a deficit of ~4¾% of GDP, one of the largest

deficits on record (apart from COVID). Government budgets currently forecast the total

deficit to narrow (i.e. fiscal tightening) over coming years; but UBS expect the final

budget outcome to deteriorate.

Budget mixed for the economy: public spending strong + income tax cuts

Overall, for the Australian economic outlook, the Australian Government Budget

contains mixed implications. Firstly, on the positive side for GDP growth, Australian

Government (and State Government) spending, at least in the near-term, continues to

boom. This means GDP-basis nominal public demand will likely remain strong around

~7% y/y, and contribute to nominal GDP growth a very large ~2%pts y/y. This is

particularly led by strong public sector wage income, keeping the labour market

relatively tight. This is clearly supporting overall demand and (underlying) inflation

pressure in the economy. Meanwhile, there is also further direct support to household

income via tax cuts.

But Budget tax hikes will likely slow house prices/sales & credit growth

However, on the negative side, the tax increases - for capital gains, negative gearing and

trusts (see Figure 24 for policy details) - are clearly a negative for asset prices, especially

housing. For housing, we expect a greater negative impact on housing sales/volumes,

rather than prices; with prices in the existing market indirectly supported the fungible