States adding substantively to fiscal impulse and to near term uncertainty

By Pat Bustamante Senior Economist, Westpac

With Budget season largely come and gone, we find that the national fiscal impulse is now significantly larger. The growing fiscal impulse will be an additional support for the economy but it adds to inflation risks, particularly in areas where there are existing capacity constraints.

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Budget season has largely come and gone. While the makeup of budgets differed, there were a few commons threads. The tight squeeze on household budgets has seen governments provide additional cost-of-living support. Governments are also responding to the pressures emanating from a rapidly growing population by investing more in transport, health, and housing infrastructure, as well as providing additional funding for health, education and other front-line services.

As a result, we find that the national fiscal impulse (across Federal and state governments) is expected to contribute to growth in aggregate demand in 2024-25, by around 2.2 percentage points (ppts) of GDP. This is driven by higher spending on the public services required to cater for the larger population, as well as investment in infrastructure. The national fiscal impulse in 2024-25 is around 1.2 ppts of GDP larger than prior to the recent 2024-25 budgets.

The economic outlook going forward is set to become even more uncertain. Some of the headwinds squeezing household budgets are moderating (inflation is moderating and interest rates have largely peaked). But some of the tailwinds we have seen over the last two years will also be easing, most notably the surge in population and employment growth.

The growing fiscal impulse will be an additional support. But it adds to inflation risks, particularly in areas where there are existing capacity constraints, such as the construction sector. If the concerns around persistent price pressures continue, this may add to the risk that interest rate relief is delayed.

States adding substantively to fiscal impulse and to near term uncertainty

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