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Big week, big budget or “dumb country”?

Australian spenders face a big week with the May Budget and the Reserve Bank meeting on interest rates set to take the money spotlight on Tuesday.

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So what are we likely to see in the Federal Budget? Tax and interest rate cuts – possibily. Something for women around closing the super gap – maybe.

More economists are warming to the idea of another cut to the official cash rate to below 2 per cent.

The major banks have already put consumers on notice that their lending rates could go lower. So hold off before locking anything in on the home mortgage front.

Then there’s the 2016-17 Federal Budget which is expected to be more significant than usual because it should contain a number of important sweeteners ahead of the likely July 2 election.

There is also a real threat of ratings agencies downgrading the country’s prized AAA credit rating given that we are looking at a 12-13 year run of budget deficits.

“This is despite not even having had a recession,” said AMP Capital chief economist Dr Shane Oliver.

“Rather we have done this thanks largely to a “dumb country” combination of politicians ramping up spending commitments on a whole range of things without facing up to how they will be paid for.”

There’s only about a dozen countries that hold AAA, which is the top notch rating that reflects a country’s ability to repay its debts.

Dr Oliver believes that the government should be worried about losing the AAA rating because of the message it signals to the world.

“Its loss may not ultimately have much impact on government borrowing rates. And if a downgrade knocks the Australian dollar down that would be good. So no worries here.

“Rather the real concern would be that the loss of the rating would signal an undoing of all the work in the 1980s and 1990s by political leaders on both sides of politics to set public finances onto a sustainable path.”

Some improvement in the jobs outlook and the iron ore price should offset lower wages growth and allow this Budget to be in line with projections.

“We expect the 2016-17 deficit projection to come in around $34 billion (2 per cent of gross domestic product) and that for 2017-18 to be around $23 billion,” said Dr Oliver.

Now to what we’re likely to see in the budget.

  • Possibility the raising of the $80,000 income tax threshold slightly
  • Removal of the deficit levy on schedule next year
  • A crackdown on tax avoidance by multinationals to fund cutting the corporate tax rate
  • Reduced superannuation concessions for high income earners
  • A hike in tobacco excise
  • More funding/inducements for infrastructure spending likely involving some form of partnership with private sector partners that want to take advantage of the governments low borrowing costs.

Overall, the government is expected to try to limit spending growth in contrast to the Labor opposition which is more likely to focus on growing tax revenue by reducing access to negative gearing, the capital gains tax discount and superannuation to help fund increased spending.

The next 48 hours will be interesting.

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