Given the current headwinds facing the consumer of weak income growth and a negative wealth effect, the most significant issue pertaining to monetary policy decision making is any immediate boost for the household sector. Overall, new measures aside, we need to keep the big picture in mind – the Budget is shifting from a deficit of $4.2bn to a surplus of $7.1bn.
Our Westpac-MI Consumer Sentiment survey deteriorated in March to its lowest level since September 2017, we believe the consumer will be cautious, corresponding to a relatively low spending rate of the tax cuts which limits the overall impact. Outside of these direct initiatives for household incomes in the coming financial year, other major new spending programmes centre on infrastructure and health. While we acknowledge this will provide much needed services for a growing population, in assessing the immediate impact on the economy, their effect is protracted and will have a more minor influence on 2019/20. The upcoming Federal election represents an unknown given the potential for a bidding war to emerge. Major changes to announced policy by the government would appear unlikely and the RBA is likely to see any bidding war as a temporary "sugar hit" that will not generate sustained higher income growth. The RBA is also likely to look through the near-term personal income tax relief and cash payouts for energy bills. As such, Westpac sees fiscal policy as having only a modest impact in the near term and continues to expect cash rate cuts in August and November to cushion the economy against the headwinds of 2019.