Did the Government get it right?
The short-term goal of the Federal Budget is to build confidence. Last year confidence was badly knocked around by the rhetoric of “Budget emergency” and “End of the age of entitlement”. A government should go hard in its first budget, but in an environment of weaker-than-normal economic growth and global uncertainties, it probably went a little too far.
When we analysed last year’s Budget we noted: “While the desire to ‘reboot’ the economy is commendable and even advisable from a medium-term standpoint, the ‘budget emergency’ rhetoric has been unduly negative, depressing confidence levels. It remains to be seen whether there is a lasting negative impact on the economy, checking momentum in the economy.”
In the end, confidence didn’t recover and momentum in the economy was checked. It wasn’t just the Budget, but the lack of agreement between the Government and Opposition parties on budget measures as well as uncertainty on the global economy and the slowdown in China.
So this Budget is about restoring confidence. The Government has used the catchphrase of ‘helping Australians to have a go’. And that is precisely the right message for the times – reinforcing the stimulus provided by monetary policy and lifting economic momentum.
But the Budget measures need to be quickly implemented and that requires negotiation and agreement between the government and opposition parties. If Budget measures don’t get passed by the Senate, then the Government hasn’t “got it right”. It is all about proposing responsible, affordable measures that improve the quality of life for Australians and improve the functioning of the economy. But the measures still need to be agreed and implemented. Opposition parties have a role to play, but in the end it is the Government’s role to secure the necessary agreement.
There is less urgency on reducing the budget deficit in the short-term. And that is right and proper. Fiscal (budgetary) policy needs to support monetary policy in boosting economic momentum in the current environment.
The Budget deficit still needs to be reduced over time, but – like any business – the smart way is to focus on restraining costs at the same time as boosting revenues. It is much easier to reach the goal of surplus if the economy is growing at a 3.5-4% annual rate than 2.5-3%.
The good news is that the Budget deficit is projected to narrow in coming years – and it will have a chance of achieving those goals if the economy lifts and drives revenues.
There is a good balance between short-term and long-term measures. And there is a boost to the economy in the short term and improved Budget position in coming years. The hope is that the Senate will give it a chance to work.
What does it mean for Australia?
In the short-term, much depends on getting Budget measures through the Senate. Ongoing failure to implement budget measures risks losing support of foreign investors and puts at risk Australia’s AAA credit rating.
If the Federal Budget plays its role in working to improve business and consumer confidence, then there is a greater chance of firmer economic growth, meaning lower unemployment.
The longer-term goal of the Government is the same as it has been for some time – pushing ahead with the PPP policy to combat the challenges of an ageing population. PPP is increased labour market participation, increased productivity, and increased population growth. It is an under-stated policy, but has characterised budget policy for a decade.
Tightening pension eligibility is important from a fairness perspective and the future demands on the budget.
Boosting childcare places is important to the goal of raising workplace participation and reducing the reliance on government handouts by Australian families.
Implications – Interest rates
The Reserve Bank cut the cash rate at the April Board meeting but provided no guidance on future moves on interest rates. But it is clear from the forecasts contained in the latest the Statement on Monetary Policy that the Reserve Bank has an “implicit” rather than “explicit” easing bias (that is, bias to cut rates). Forecasts for both economic growth and inflation were trimmed by 0.25% in the latest Statement.
The Budget has been structured to get people moving – cut taxes for small business, boost childcare and pension payments to those that need them and lift spending across towns and regions. If the Budget is successful in lifting confidence and economic momentum then the Reserve Bank can stay on the sidelines for longer.
Implications – Australian dollar
We don’t believe the Federal Budget has major implications for the Australian dollar. Still, that has been the case for probably over a decade now. And an assurance by ratings agency Fitch that Australia’s AAA credit rating is unlikely to be at risk for the next two years further muffles any budget impact on the currency.
Our currency strategists believe that if other rating agencies downgraded the outlook for Australia’s AAA rating, at worst the currency would fall US2 cents. There is reportedly good underlying support for Australian federal, state and corporate bonds.
Fiscal policy has been modestly contractionary, while monetary policy has remained accommodative. And that is set to remain the case. And it is certainly something the Reserve Bank has already factored in. The Reserve Bank has an implicit easing bias, and that should serve to restrain upside for the Aussie dollar.
If the Budget measures are passed by the Senate – and passed quickly – and business and consumer confidence improves, then the Reserve Bank is more likely to change to a “neutral” stance. But those are two big ‘ifs’. Still, in such a case the budget would serve to support the Aussie dollar or even drive it higher.
The more important influence on the Aussie dollar over the next six months will be US monetary policy. When financial markets are confident that the Federal Reserve is set to start the process of hiking interest rates, the US dollar will start to lift, thus causing the Aussie dollar to ease to the low to mid 70s against the greenback.
CBA group currency strategists tip the Aussie dollar to fall to the range of US70-75 cents in 2016.
Implications – Sharemarket
Further assurances by other rating agencies that Australia’s AAA credit rating is safe would prove positive for the Australian sharemarket.
The federal budget is attempting to backstop monetary policy and lift economic momentum. The key to higher share prices is stronger revenues and profits. So any success achieved by the budget in boosting economic growth will support the sharemarket.
The big unknown is the Senate response to the budget measures. So investors must be wary not to over-react to any measures contained in the latest budget.
The small business tax cut and depreciation measures should be supportive for the hardware chains, Officeworks, telecommunications providers and business-to-business operations.
Changes to the cost and affordability of childcare and pensions won’t occur until 2016 and 2017 and are contingent on Senate agreement. But companies like G8 Education, Affinity Education, Japara Healthcare and Estia Health are possible beneficiaries.
Who are the winners? (source: Budget Papers, AAP)
- A $5.5 billion Jobs and Small Business Package will provide major incentives for businesses to invest, hire and grow.
- Small (under $2 million annual turnover) incorporated businesses will benefit from a 1.5% cut in their company tax rate (effective 1 July 2015).
- A 5% tax discount to unincorporated businesses with annual turnover less than $2 million from 1 July 2015 – broadly in line with the 1.5 percentage point tax cut for small incorporated companies. The discount will be capped at $1,000 per individual in an income year, and it will be delivered as a tax credit in their tax return.
- All small businesses will receive an immediate deduction on each and every asset costing less than $20,000 bought between Budget night and 30 June 2017.
- The package includes $375 million aimed particularly at improving opportunities for Australians to get a job and reaching out to disengaged youth.
- A total of $3.5 billion reform package to make child care simpler, more affordable, accessible and to support return to work.
- $869 million for Child Care Safety Net to assist vulnerable, disadvantaged children.
- $843 million invested in preschool programs.
- $250 million on interim Home Based Carer pilot program (Nannies Trial).
- $250 million for drought concessional loan scheme.
- $35 million for projects in drought hit areas.
- $25 million to manage pests and weeds in drought hit areas.
- $20 million to expand counselling programs for drought hit communities.
- Fringe Benefit Tax abolished on all portable electronic devices like phones, laptops and tablets used for work.
Who are the losers? (Source: Budget Papers, AAP)
- Pension reforms – new assets test threshold; wealthier pensioners will lose the pension or have payments reduced.
- Multinational Anti-Avoidance Law to recover unpaid taxes by large international companies that shift profits overseas.
- GST on digital downloads (Netflix tax) to raise $350 million.
- FBT tax cap exemption of $5,000 for meal and entertainment expenses for not-for-profit organisations (save $295 million).
Foreign Aid Beneficiaries
- Cut of up to $1 billion in foreign aid, with aid spending to Indonesia cut by 40%.
- New fee regime for foreign investment in Australia to deliver $735 million in revenue.
- Tax-free threshold of $20,000 for foreigners on working holidays removed; saving $5.4 million.
Published: Wednesday, May 13, 2015