2019 Federal Budget: NAB Economic Commentary

As anticipated, the Coalition delivered an election Budget – but the headline tax cuts only hit in 2022-23. Meanwhile, questions abound about the Government’s optimistic forecasts and just how stimulatory this Budget is.

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Commentary

This Budget needs to be seen in its political context. It is more like an election manifesto than a traditional Budget and big questions remain around what parts, if any, will actually be implemented.

Firstly the fact that the Budget is projected to return to surplus is unquestionably a good start. That has largely occurred on the back of expenditure constraint, bracket creep and higher commodity prices (especially iron ore, where the difference between the current and the previous forecast price is – on our estimates – around $7bn per annum). Also the economic forecasts are unlikely to fundamentally change.

As to the Budget itself, a lot of the headlines are about personal income taxes. In the near term the low to medium income tax offset has doubled to a maximum of $1080 per annum and the second tax threshold (of 32.5%) has been raised from 87k to 90k. However the really big tax adjustments don’t come till 2022-23. Put differently the near term cost to the Budget is only $700m per annum, whereas $4.5bn of the total spend of $6.7bn in the four years to 2023 comes in the final year. Also a lot more money is given to the Tax office to improve integrity but again is mainly spent in the out years.

The infrastructure package has been boosted by around $25bn to around $100bn in the long-run. However in the next four years the additional spend is around $4.5bn with the big ticket items including the Urban Congestion fund, Victorian fast train (Melbourne to Geelong) and the Road safety program. Also to alleviate the impact of high energy prices the government is also making a one-off tax-free payment to about 3.9 million welfare recipients, mainly age and disability pensioners (singles receive $75 and couples $125). SMEs also get a tax cut to 25% (phased in over 3 years) while the instant asset write off rises to 30k per investment (and $50m of turnover).

It will be interesting to see how Labor responds to the personal tax changes. They have previously refused to support the 2022-23 tax changes. Labor may well keep the near term adjustments but aim to produce bigger and nearer cuts at the bottom end (their current stance is to concentrate tax cuts below the $125k).

Clearly the Budget has been constrained to keep the surplus. The Government has retained the tax to GDP limit of 23.9% of GDP but the surplus really doesn’t go much above 0.7% in the next four years. That means as shown in our Medium Term Context Section (see Page 3), that the Budget over the next few years adds little by way of fiscal restraint in the out years. Most of improvement in revenue continues to rely on income taxes (bracket creep) till 2022/23. And the outlays continue to shrink as a percent of GDP (a better performance than in recent years – which may have benefited from NDIS underspend).

As talked about below we also question the “optimism” of the Budget forecasts – especially real GDP and wages. So in our view the Budget is not as stimulatory as it seems to be – or is being sold as. It does not change our view on the economic outlook and how consumers will see their expenditure decisions. Nor would the outlook of the RBA be much affected.

Fiscal Outcome

The underlying cash position is expected to be in moderate surplus in 2019/20 (around $7bn or 0.4% of GDP) and rise gradually in the out years but by 2022-23 is still only around 0.4% of GDP. That is a slim surplus that remains vulnerable to any weaker than expected economic outcome. The Net Operating Balance (which adds back Government investment) rises more strongly – from around 0.5% in 2019/20 ($12.9bn) to around 1% by 2022-23 ($20.6bn).

Economic Outlook

Fundamentally we are a touch more pessimistic than the Treasury on the real economy in the out years. Beyond the current year we see the economy as tracking around 2¼% (the same as 2018/19). Treasury however sees growth around 2¾% in the out years. As a result we see higher unemployment and significantly weaker wages growth. Our profile sees the consumer still struggling with their cash-flow and hence with any discretionary spend. Also house price falls will see construction activity fall another 20% over the next two years. That said infrastructure spending, NDIS spending in public consumption and LNG exports will support the economy. The Treasury is more pessimistic on commodity prices (terms of trade falling by around 5% in each of the out years) leading to lower growth in nominal GDP. Finally we really struggle with any wages growth forecast above 3%.

Financial Markets

There was little discernible market reaction to the Budget. Like most analysts we question whether this Budget will ever be implemented. That said a run of (albeit thin) surpluses is reassuring and will almost certainly be replicated in Labor’s alternative.

For further details, please see the 2019 Federal Budget Economic Commentary