HSBC economist calls for end to Federal Budget squeeze

There are calls for an end to the Federal Government's budget squeeze from a major international bank.

HSBC chief economist for Australia and New Zealand, Paul Bloxham, said the local economy needs a cash injection not budget cuts.

The former Reserve Bank economist said growth is below trend and more needs to be done to make up for the fall in mining investment.

Mr Bloxham said the Federal Government made a mistake with the tough spending cuts in the Federal Budget at a time when the mining investment boom was ending and the economy was slowing down.

"I think 2014 wasn't a great year for fiscal policy," he told the ABC in an interview.

"We ended up with a budget deficit that doesn't look much different in the scheme of things, but we ended up with all the rhetoric associated with a government that was seeking to cut back and so that did some damage to sentiment.

"So in the end we got the worst of both worlds."

The HSBC chief economist said he hopes the government will change strategy this even though he admits it will be difficult politically.

"We think that the Government does need to change tack," he said.

"Fiscal policy needs to be somewhat accommodative of growth at the moment because growth is running below trend and commodity prices have fallen.

"And because Australia has fairly low levels of government debt there is scope for Australia to support the overall economy with fiscal policy."

Mr Bloxham said that one of the biggest challenges facing Australia is how to shift economic growth from mining to other industries.

He added that the Government needs to direct more money towards infrastructure projects as the states are doing.

Mr Bloxham thinks if next week's consumer inflation figures are weak then the Reserve Bank is likely to cut interest rates further.

The official cash rate has been on hold for 17 months, leaving mortgage rates around the lowest levels in 50 years.

Big banks, including Westpac, have predicted that the Reserve Bank could cut interest rates by half a percentage point this year in two rate reductions.

Westpac chief economist, Bill Evans, has forecast that the first rate cut could be as soon as next month.

HSBC is predicting that the Australian economy will expand by 2.8 per cent in 2015 and 3.2 per cent next year.