AUSTRALIA is set to begin winding back its massive pandemic-era stimulus, even as its central bank remains an outlier among peers in sticking with near-zero interest rates.

       Prime Minister Scott Morrison’s administration funnelled cash to households and firms to cushion the blow of Covid-19, wracking up record budget deficits and government debt in the process.

       That, combined with the Reserve Bank of Australia’s (RBA) 0.1% cash rate, has spurred consumer spending, hiring and house prices – and now, inflation.

       The government will announce a deficit of A$76.9bil (US$57.9bil or RM244bil)) for fiscal 2023, narrowing to A$50bil (RM158bil) by fiscal 2025, economists predicted ahead of the budget’s release.

       Yet, just a week later, they expect the RBA will keep rates unchanged once again.

       Of the seven biggest pandemic spenders, only Australia and Japan are yet to raise rates. Economists estimate Australia’s budget deficit will be 3.3% of gross domestic product or GDP in fiscal 2023, narrowing to 2% by 2025.

       That compares with a Group of 20 nations average of 4% in calendar year 2023 and 3.5% by 2025, according to the International Monetary Fund’s fiscal monitor.

       Surging prices of some of Australia’s top exports – iron ore, coal and liquefied natural gas – are already delivering a windfall to the fiscal coffers.

       That will improve the budget outlook even before Treasurer Josh Frydenberg tightens fiscal settings, which he is expected to do cautiously given an election is due in less than eight weeks and the government trails in opinion polls.

       The Australian labour market’s recovery has also been much stronger than initially predicted, with unemployment now at a 13-year low of 4%, compared with a forecast in the government’s December budget update of 4.5% by mid-2022.

       More people in jobs means less spending on welfare and more revenue from additional taxpayers, also helping narrow the deficit.

       Economists expect the jobless rate will fall to 3.7% later this year, a level unseen since the early 1970s.

       Yet, RBA governor Philip Lowe remains dovish, willing to run the economy hot to overcome the “inertia” in a wage-setting process that sees pay gains lag well behind the economy’s strength. — Bloomberg

       Swati Pandey is a Bloomberg journalist covering the economy. The views expressed here are the writer’s own.