Economic Outlook

• The focus of this Budget is very different from last year. Given the political problems of last year’s Budget, much focus has been placed on attempting to make this Budget as politically saleable as possible. Also, unlike last year, the Budget is relatively neutral in its impact on the broader economy. Essentially new expenditures have been broadly offset by savings.
• More than any Budget in recent memory, most of the key changes were pre-announced / leaked – again to emphasise the “no surprises” focus. Thus the key spends include a $5.5bn small business package (really micro business – i.e. turnover of less than $2m per annum), including tax cuts and more importantly a 5% tax discount applied to other tax payments, immediate write-offs of new assets up to $20000, tax advantages for crowd funding and FBT exemptions to SME electronic purchases. Elsewhere there is $3.5bn spending on childcare incentives (but linked to stalled family tax benefits savings); a new infrastructure fund for Northern Australia ($800m); extra incentives for employment of older Australians; drought spending ($330m); border/terrorism spend ($500m); a payment to offset Western Australia’s GST issues ($500m); extra spending on the PBS ($1.6bn) and the reversal of last year’s doctor rebate savings.
• Equally the savings were well flagged: including a “new law” on cross border profit shifting: GST on intangible/services (Netflix tax); pension savings by lowering the non-home asset threshold to $800k ($2.4bn); tightening of the paid parental schemes (anti double dipping between private and public schemes); the withdrawal of Melbourne East West Link money ($1.5bn) and further public service efficiency dividends. As set out in the section on the Medium Term Fiscal Outlook, the Budget really is a combination of redirected policy spending broadly offset by substantial increases in revenue to GDP – bracket creep. Outlays broadly grow in line with GDP (which is better than the previous upward trend). Also the economic impact of the Budget on the economy is relatively neutral.
• Broadly the Governments forecasts are very similar to NAB’s and hence we see the projections as credible. Of course to the extent we have all overestimated growth – especially in a low wage growth and falling commodity price world – the Budget remains open to the disappointments (especially on the revenue line) that we have seen in recent years. But with a credible set of forecasts (and deliberately conservative iron ore price assumption – Treasury $US 48 vis-à-vis NAB’s $US60 per tonne) the rating agencies should be relatively satisfied. Equally we would not expect the very negative reaction of consumers to this year’s Budget. That said, we would not really expect much of a kick to business confidence – outside of micro business. Of course the Budget is not the complete current fiscal story. There is still the Tax White Paper to come – the Budget had little on big tax and superannuation questions. Also there is still the debate about what happens to Government’s removal of $80bn in state funding for health and education in the out years. And finally, despite the Government’s best efforts, what happens in the ensuing political process is unknowable.

Fiscal Outcome

• The underlying cash deficit for 2014/15 is estimated at $41.1bn and $35bn in 2015/16 (or 2.1% of GDP and below market expectations – but near NAB’s). The projected deficit then moves down to $14.4bn in 2017/18 (0.8% of GDP) with an eventual return to surplus in 2019/20. Basically the reduction in the deficit is driven by returning revenues which rise from 23.9% of GDP in 2014/15 to 25.7% in 2017/18 (accruals basis). Outlays move from 26.1% to 26.0% of GDP in the same period

Economic Outlook

• As noted above there is little fundamental difference between Treasury’s and NAB’s economic outlook. At the margin we are slightly less optimistic in the near term (NAB 2.3% Treasury 2.5% in 2014/15) but slightly more optimistic in 2015/16 (NAB 2.9% Treasury 2¾%). An interesting difference here is our slightly more pessimistic view on business investment. That said the RBA is more pessimistic on 2015/16 growth than either Treasury or NAB. At the margin Treasury has a slightly higher unemployment rate in year average terms in 2015/16 (NAB 6¼% Treasury 6½%). Finally on the critical nominal GDP forecasts (for Budget deficit forecasting) there is little difference between NAB and the Treasury (both around 1½% and 3½% in the next financial year)

Financial Markets

• Modest but nonetheless positive market reaction to the Budget. The $A has pushed 30bps higher towards 0.7990, although it was trading higher before the Budgets release. Bond futures improved 2-3 basis points (i.e. yields lower), presumably because the debt program is a little less than expected and the major ratings agencies have been quick to say the Budget doesn’t pose any immediate threat to the AAA rating.

NAB Budget Report 2015 (PDF, 534kb)