Will the post-budget bounce rescue the Australian economy?

There was much debate over whether Prime Minister Scott Morrison received a political boost from the recent Federal budget, but there is less doubt that Australian consumers responded positively.

According to the Westpac/Melbourne Institute’s monthly survey, Australian consumer confidence in April ticked up 1.9 per cent from the previous month, helped by the release of the budget.

But will that boost to consumer confidence continue and if so, be enough to alter the outlook for a downward movement in interest rate cuts?

A tax-driven boost

The confidence boost is likely related to the tax cuts the Government announced in the budget. The proposed tax cuts will see the Government double the low-and-middle-income tax offset from July, which will help deliver an additional $10 a week to low-to-middle income earners.

Those tax cuts are worth about 0.5 per cent of gross domestic product (GDP) by our measures. That is not an immaterial amount. Tax cuts of 0.5 per cent of GDP are much larger than any fiscal stimulus households have received over the past few years.

In subsequent years, the Government proposes more generous tax stimulus, especially for higher income earners. From 2022 it will expand the 19 per cent rate tax bracket and reduce the 32.5 per cent rate to 30 per cent in 2024.

Benefits to retail to be overwhelmed by housing

Because the 2019 tax cuts are focused towards low-and-middle-income earners, they should lead to a bump in retail spending to some extent, as that cohort typically have a higher propensity to spend surplus money rather than save it.

But the big question remains as to whether the recent budget is enough to create a longer-lasting bounce in consumer confidence.

We don’t think so. History tells us there is often a positive bounce following a budget which then disappears so, in the lead up to the Federal election, we think that the post-budget boost in consumer sentiment will start to fade.

But more importantly, we think that the on-going weakness in home prices will overwhelm any benefit the budget delivered to consumer confidence and spending.

Falling property prices are dragging down consumer wealth and that will be more of a driver of retail spending.

So, despite the budget bounce, we are still concerned that the Australian retail environment and consumer spending will be pretty low over the course of 2019.

Rate cuts still on the cards

Despite the improvement in consumer confidence, in our view the Reserve Bank of Australia will still move to cut interest rates twice this year, and we will end 2019 with a cash rate of one per cent.