been welcomed by market analysts

as a workman-like performance,

although doubts remain over

whether it will cap inflation.

Market economists found little, if

anything, to surprise them in the new

Government's first budget which

featured tax cuts for low- and

middle-income earners while the

wealthier lost some benefits.

Most worried that Treasurer

Wayne Swan's fiscal instruments had less chance of reining in inflation

than the Reserve Bank of Australia's

monetary policy.

CommSec's chief equities analyst

Craig James described the budget as

''stodgy'' and ''responsible''.

However, he said it failed to put

downward pressure on inflation.

''Some prices could fall as a result

of the Government's spending cuts.

Other prices will rise, such as cars

and private health insurance,'' he

said.

''But funds allocated to education

and infrastructure will assist in lifting skills and productive capacity and

deal with medium-term inflationary

pressures.''

He noted the challenging economic

environment combining a global

financial crisis, soaring global fuel

and food prices and an economy

flush with cash from the China-

driven resources boom.

A more meaningful impact on

inflation would have required drastic

measures, such as lifting the GST rate

to slow spending and keep interest

rates on hold.

''Not only would these measures also significantly slow the economy,

but they would have been unpalatable

and could also have had negative

side effects,'' Mr James said.

''Such drastic measures would

have included increases in excise,

personal or corporate tax and broad-

based cuts to welfare payments.''

Analysts at investment bank JP

Morgan also noted the tough economic

terrain confronting Mr Swan

and acknowledged the overall effect

of the budget was contractionary.

Even so, it could have been made

even more contractionary by deferring

the tax cuts risky for the new

Labor Government or cutting government

spending further.

As a result, the central bank may be

forced to use its own anti-inflation

mechanism and raise rates again.

JP Morgan chief economist

Stephen Walters said, ''If necessary,

RBA officials will finish the job the

Government has left only half-

completed.''

Analysts at Macquarie Research

Economics have identified another

potential inflation risk in the

escalation of migration numbers, especially the 31,000 boost in skilled

migration.

The move is designed to ease the

pressure on employers as the economy

stretches to capacity.

But Macquarie's analysts also warn

the increase will add to the strong

demand for housing and other

services and may put upward pressure

on prices.

Labor's decision to push

$40billion into three nation building

funds covering education, health

and infrastructure also was

expected to increase demand on labour, materials and equipment,

which already are in short supply in

the near term.

But analysts agreed the longer

term result would be higher productivity

and lower costs.

The infrastructure funds were

praised by Citigroup analysts, too, for

their effect on states finances.

Citigroup's head economist

Stephen Halmarick welcomed the

budget.

''We see this as a major positive for

the state government bond market,''

Mr Halmarick said. AAP