The backdrop for the May budget looks set to be one of soft economic growth and even lower interest rates.


The Department of Treasury has been waiting for Thursday’s latest figures for business spending plans to feed into their economic budget forecasts.

They would have been disappointed.

New data shows the first estimate for business investment in the 2015/16 financial year is $109.8 billion, more than 12 per cent lower than the first indication for 2014/15.

Macquarie Research economist James McIntyre described Thursday’s result, along with a larger than expected 2.2 per cent fall in actual capital expenditure in the December quarter, as “cringe-worthy”.

He said the report solidifies his view that the Reserve Bank will cut the cash rate to two per cent from 2.25 per cent at next Tuesday’s monthly board meeting.

“Where the data does shift our thinking is on the likelihood that the RBA will need to take the cash rate below two per cent,” Mr McIntyre said.

The fall in capital expenditure in the final three months of 2014 suggests next week’s national accounts will show annual economic growth remaining below three per cent and keeping upward pressure on the jobless rate.

It will put further pressure on the budget through welfare payments and dwindling tax revenue.

But Treasurer Joe Hockey is putting on a brave face, saying the government has come a long way in its structural repair of the budget, although he concedes there is more to do.

“The government can start to see some clear air, start to have some sunshine … in relation to the budget,” he told Sky News.

Mr Hockey will release his five-yearly intergenerational report next Thursday, which will show the challenges facing Australia over the next 40 years.

He said as long as the government lives within its means it can make sure that Australians over the next four decades have the same, if not better, quality of life than today.

The treasurer also said the $200 million that is expected to be raised from foreign investment application fees will largely go towards funding a compliance unit in the Australian Taxation Office and the cost of improved screening processes.

“There may be some left over to help repair the budget,” Mr Hockey said.

Every little helps.