NAB Group Economics’ Budget Commentary

NAB Budget Commentary 2016 – 17

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  • This Budget clearly has a political as well as economic dimension – and in particular is framed against the assumption of an upcoming election.
  • As such it is really an exercise in selected refocusing of outlays and receipts to achieve the Governments focus of “growth and jobs” – but achieved within a realpolitik framework of burden sharing and keeping debt at sustainable (AAA) levels.
  • The current environment means there is little scope for large structural reforms.
  • And with a Budget not likely to get back to surplus by 2020/21 – and then only marginally – it clearly remains vulnerable to the vagaries of the economic cycle.

Comments

This Budget clearly has a political as well as economic dimension – and in particular is framed against the assumption of an upcoming election. As such it is really an exercise in selected refocusing outlays and receipts to achieve the Governments focus of “growth and jobs” – but achieved within a realpolitik framework of burden sharing and keeping debt at sustainable (AAA) levels. The current environment means there is little scope for large structural reforms. And with a Budget not likely to get back to surplus by 2020/21 – and then only marginally – it clearly remains vulnerable to the vagaries of the economic cycle.

Key measures are largely as “signaled” in recent days. On improving the ‘equity front”: there is the raising of the 32.5% personal income threshold from 80k to 87k (to help offset some effects of bracket creep), tougher rules on top end superannuation (lowering the threshold for the higher tax on super from $300k to $250k and imposing annual and lifetime caps on extra super contributions) and easing the tax treatment of super for lower to middle income contributors. Also on the equity theme is stricter enforcement of multi- national tax (essentially a “Google tax with diverted income to be taxed at 40%)

On the adding to “growth” theme is business tax cuts (from 28.5% to 27.5% for small and middle business (with the turnover threshold raised to $10m). Thereafter the turnover limit is progressively raised till all business gets the rate by 2023/34 and the rate then falls to 25% in 2024/25. There is an extra benefit in that the investment tax write off has been extended for an extra year. That said, the size of the near term cuts are limited (around $5.3bn over 4 years) – and our modeling suggests very small near term benefits. There is also extra money for infrastructure $5bn; extra money for health ($2.9bn); and education ($1.2bn – albeit much less than full Gonski). Also helping to repair the Budget bottom line is the (12½%) increase in tobacco taxation.

Outlays remain under 26% of GDP before moving a touch lower in the long run. By way of context, outlays peaked at around 27% during the GFC stimulus and before that around 23% of GDP. Revenue still does most of the repair job on the budget balance with a combination of policy and economic recovery. Overall net debt peaks a touch higher in 2019 at 19.2% (previously 18.5%) and starts to edge lower thereafter. Rating agencies have been much more guarded in their reaction than usual. As set out in the “Medium Term Economic Outlook” the Budget would represent a slight drag on economy going forward (around ½% per annum) and as such is probably doable.

Of course the Budget may not be the final word on medium term fiscal sustainability given the forthcoming election campaign. Our bottom line is there is not a lot of scope for pulling further “rabbits from the hat”. And that Budget repair will be a long and difficult “slog” given the economic environment. We are more cautious in 2018/19 forecasts.

Fiscal Outcome

Estimates of the underlying cash deficit are slightly larger at A$39.9bn (2.2% of GDP) in 2015/16 and $37.1bn (2.4% of GDP) in 2016/17 (slightly below market expectations – but near NAB’s). The projected deficit then moves down through the out-years with an eventual return to surplus in 2021/22.

Economic Outlook

There is little fundamental difference between Treasury’s and NAB’s economic forecasts in the next few years. A sharp increase in commodity export volumes, offset by subdued domestic demand, remains the common theme. However, NAB forecasts shift notably more pessimistic as we move into the forward projections (from 2018-19) reflecting significant headwinds as LNG exports reach their peak band the dwelling construction reduces. Over the forward estimates, expectations for the unemployment rate are similar, easing to around 5½% in the near-term before stabilizing. On the nominal GDP forecasts, NAB and Treasury expectations are similar in 2016-17 (around 4¼%) but the Treasury’s 2017-18 forecasts are more optimistic.  A real concern for the Budget repair path.

Financial Markets

There was little discernible market reaction to the Budget. Ratings agencies have been circumspect in their initial reaction to the Budget, and have not provided their typical rubber stamp, most choosing instead to allow more time for analysis.

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