Pragmatism and fairness rule
- The 2017-18 Budget has a welcome focus on housing affordability and infrastructure.
- Subdued wages growth is keeping revenue collection down contributing to a slight deterioration in near term deficit projections (a deficit of $29.4bn for 2017-18) but a return to surplus is still projected for 2020-21.
- This year’s Budget should be positive for confidence.
- The impact on the RBA and the shares is likely minimal.
The 2017-18 Budget has much to make it popular. In fact, the goodies make it almost feel like a pre-election rather than a post-election budget. The transformation from the austerity to end “the age of entitlement” of the 2014 budget to the “fairness, security and opportunity” of this Budget has been profound.i
Key budget measures
As always, most of the key new measures were pre-announced or leaked. On the spending front, the goodies include:
- A further ramp up in infrastructure spending (by an additional $20bn over the forward years) including Western Sydney Airport, inland rail & various road projects.
- Extending the small business $20,000 asset write-off scheme and working with states to remove red-tape.
- A housing package: first home buyers can save via their super for a deposit out of pre-tax income (up $30,000), retirees who downsize get exemptions from super limits, more stringent rules on foreign investors (eg, vacant home tax), encouraging the supply of low cost community housing and rewarding states for boosting supply.
- Increased spending on health through committing to fully fund the National Disability Insurance Scheme and reintroducing Medicare rebate indexation.
- Removal of the “zombie” welfare cuts.
- $18.6bn over ten years in extra school funding (Gonski 2.0).
This has been offset by various savings, including:
- Increased university fees.
- An increase in the Medicare levy by 0.5% from 2019.
- A 0.6% levy on the major banks with liabilities over $100bn.
- More measures to curtail the cash economy and improve the integrity of the tax and welfare system.
Little change to the deficit outlook
Despite a temporary boost to corporate tax revenue from a bounce in the iron ore price, extra spending and soft personal tax collections on the back of weak wages growth means the near-term budget deficit outlook is a bit worse than MYEFO and $2.3bn worse over four years compared to last year’s budget. The return to surplus has been maintained for 2020-21 and looks better at 0.4% of GDP. After a 2016-17 budget deficit of $37.6bn, the deficit for 2017-18 is forecast to be $29.4bn (1.6% of GDP).
Underlying cash budget balance projections
|2016-17 Budget, $bn
|Policy changes, $bn
|Parameter chgs, $bn
Federal Government spending and revenue
|% to June
Assessment and risks
Unfortunately after 102 quarters without a recession there is no support for hard-nosed economic reform in Australia and this also applies to reforms to limit spending growth. So we continue to rely inordinately on assuming the best to drive revenue up. This is evident in the Budget’s projections for average revenue growth of a whopping 6.7% per annum over the next four years. Such optimistic assumptions have disappointed in recent years and the biggest risk now is that wages don’t accelerate as assumed leading to continuing poor personal tax collections.
While the Budget still projects a return to surplus by 2020-21, it remains pretty thin and the budget deficit projections over the next two years actually take us further away from a surplus not closer. The trouble is we don’t have a lot of flexibility to provide stimulus should the economy turn down. While the 2017-18 Budget should help us keep our AAA sovereign rating for now, the risk remains high that we lose it at some point.
Budget surplus projections – still blowing in the wind
Public investment needs to offset slow business investment
Finally, it’s commendable to see housing affordability being a key part of this Budget. Certainly the measures are to be welcomed, particularly those helping first home buyers, downsizers and measures to boost supply. Getting housing supply up on a sustainable basis is critical so the key is for the Federal Government to follow through with its plan to incentivise states to meet housing supply targets.
Implications for the RBA
Implications for Australian assets
Bonds – a major impact on the bond market from the Budget is unlikely. With five year bond yields at 2.2%, it’s hard to see great returns from sovereign bonds over the next few years.
Shares – the potential boost to confidence from this Budget could be a small positive for the Australian share market. Overall, the Budget’s impact is unlikely to be huge. Construction stocks may be beneficiaries and banks losers.
Property – the Budget’s housing affordability measures may have an impact on home prices over time if they incentivize states to ramp up supply, but it’s likely to be marginal in the short term. We continue to expect momentum in the Sydney and Melbourne property markets to slow.
Infrastructure – the ramp up in infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised.
The $A – the Budget alone is unlikely to have much impact on the $A. With the iron ore price falling back again, the interest rate differential in favour of Australia continuing to narrow and the $A still too high, the downtrend in the $A is likely to resume.
Dr Shane Oliver