ANALYST: The budget 'hung the Australian economy out to dry' and more rate cuts are now needed

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In the wake of the release of last night’s budget there is understandably a lot of focus on the small business and domestic growth supporting aspects of the government’s plans.

But, Capital Economics economists Paul Dale and Adam Collins released a note overnight saying the Australian economy had been hung out to dry and the RBA will need to cut rates further as a result.

Dale and Collins note that the strengthening of the Australian dollar and the re-affirmation of Australia’s Triple A status by both Moody’s and Standard and Poors shows an appreciation of Treasurer Joe Hockey’s decision to “stick to his plans to eliminate the cash deficit over the next five years”.

But in what is the most bearish take on the budget we’ve read, they note that the Treasurer “will see this as a victory, but it comes at the expense of not supporting the economy when it could use a helping hand”.

Further they say that:

The 2015-16 Federal Budget wasn’t quite as “dull” as the Prime Minister had warned, but by leaving the fiscal squeeze scheduled for the next few years intact, it didn’t help the economy one bit. This places the burden of responsibility to support the economy squarely on the shoulders of the Reserve Bank of Australia (RBA). We believe it will respond by cutting interest rates from their current record low of 2.0% to 1.5% by the end of the year.

They are also forecasting iron ore to $40 a tonne and the Aussie dollar to fall to 70 cents.

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