The 2015-16 budget deficit forecast has been revised up to $35.1bn, more than double the estimate from 12 months ago, but a marginal improvement on the $41.1bn deficit expected for 2014-15.
- Fiscal policy will remain a drag on the economy in the budget year and through the forward estimates. There has been a slight moderation in pace, but the destination remains the same with a surplus still predicted in 2019-20.
- The key difference between the 2015-16 budget and the disastrous 2014-15 budget is in the communication, and the nature of the measures. The harsh edges of many of the last budget’s measures have been smoothed, with policy decisions adding $9.3bn to the deficit over the forward estimates.
- Confidence is likely to be boosted by the measures in the budget. Particularly the two key policy packages – the Jobs and Small Business, and Families packages.
- Clearly, the government has not missed calls for a fiscal catalyst to re-enliven the economy. Or at least heeded the message from the opinion polls. This year’s budget is clearly designed with a view to improving the government’s popularity. The economy may receive a boost in the meantime.
- The key test for the 2015-16 budget is whether it boosts confidence. Expectations have been lowered. Even a ‘null’ in terms of impact on confidence across the economy could be considered a budget ‘win’ relative to last year. At first glance, the budget has the potential to better that outcome. But the communication task lies ahead.
- Fiscal consolidation is still occurring in the budget. The pace of deficit contraction is marginally slower. The government is continuing to pursue structural budget repair despite the economy continuing to grow at a belowtrend pace and a rising unemployment rate. Whilst not ideal, the difference this time around is that the key policy packages in the budget are framed in a way that is designed to boost sentiment. It could just work.
- Whilst the small business measures will boost confidence, and potentially demand and hiring, the opportunity to boost the economy with a substantive infrastructure package that boosts long-term potential and improves competitiveness (particularly around urban rail) has been squibbed. There was nothing new on the infrastructure front, and the government’s own forecasts imply continued weakness in public demand. If consumers and small businesses don’t respond, the RBA will be left to pick up the can for the economy.
- Many of the longer-term challenges, such as dealing with excessively generous superannuation concessions and the discounted tax on capital gains, remain unaddressed. Longer-term agreements with the states for health and education still need to be funded. But for the short term, it appears that restoring confidence, and also popularity, is the over-riding focus.
Impact on households
- Unlike the previous budget, where households were subjected to a range of budget nasties, the FY16 budget seems to have softened some of the blow for households – particularly at the lower end.
- The key changes still result in the budget extracting savings from households, but the target of those savings has been redirected somewhat. On pensions, the decision to shift to CPI indexation has been reversed, which will put additional money in the hands of high marginal propensity to consume groups. But this has been partly offset with an increased taper rate for access to partpensions by wealthier households.
- Reforms to the child care rebate will provide additional, simpler, support to households and are designed to encourage participation. But these changes come at the expense of subsidies for higher income parents, and also entail cuts to family tax benefit payments.
- Reversals of ill-considered and unpopular measures from last year’s budget, such as the GP co-payment and the denial of access to unemployment benefits for 6 months, also softened the hits to households.
- Overall, the impact on households is likely to be positive. The key outcome is likely to be alleviation, over time, of the dampening of consumer sentiment as the government looks to achieve a lift in popularity and electoral acceptance of its policy measures.
Impact on businesses
- In the lead-up to the budget, the focus around businesses was directed on the moves to strengthen the integrity of Australia’s corporate tax system, particularly around profit shifting by foreign multi-nationals. However, overall – both directly and indirectly – the budget appears a net positive one for businesses.
- Small businesses in particularly are the major winners, with a tax cut (the company tax rate for firms with turnover less than $2mn shifts from 30% to 28.5%). Unincorporated businesses will also receive a discount on income tax payable, up to $1,000 per annum. The cuts come at a cost to revenue of $3.3bn over the forward estimates.
- The other win for small businesses is the reinstatement of the instant asset write off. As of 7:30pm, firms with turnover under $2mn will be able to instantly write off assets that cost less than $20,000 and are purchased between now and 30 June 2017. This is an enlarged version of the instant asset write-off that was originally cancelled as part of the mining tax roll-back. The impacts are two-fold, the boost to confidence should assist the general tone in the economy, and secondly, the demand for assets from small businesses should be a positive for larger entities – particularly in the retail sector.
The impact of the Budget on the economy
- To assess the impact of the Budget on the economy a differentiation between discretionary policy changes and the automatic stabilisers needs to be made. The 2015-16 Budget reflects the combination of discretionary fiscal policy loosening providing a boost to the supportive effects of the automatic stabilisers. This is a different outcome to the 2014-15 budget.
- Weaker nominal GDP growth, from weaker commodity prices and wages growth and slower wages growth, has reduced revenues by $52bn compared the 2014-15 budget. The government is not taking as much money out of the economy (and from businesses) as it expected – this is the automatic stabilisers in the budget at work. Whilst this is a cyclical challenge for the budget bottom line, it’s actually supportive for the economy.
- Above and beyond the discretionary policy changes in the budget is the impact on confidence. The hit to confidence from the 2014-15 budget saw a retrenchment in consumer spending, and was a contributor to the ‘capex cliff’ as weaker demand dampened non-mining investment signals. The discretionary policy changes in the 2015-16 budget are expansionary, and should also be supportive of confidence. The shift in spending from the expanded paid parental leave scheme, which the Productivity Commission consistently found would deliver no participation benefits, to fund the child care package should deliver a benefit to the economy over time.
The economic outlook
- Treasury expects the economy to grow at a subdued pace in 2014-15, gradually rising to above 3% growth by 2016-17. This is consistent with the unemployment rate peaking at 6½% in 2015-16.
- Treasury highlights that non-mining investment is taking longer than expected to recover, resulting in a downward revision to 2015-16 growth expectations. However, the projections anticipate a recovery in this area to drive 2016-17 growth.
- CPI has been contained at 1.3% over the past year by low oil prices, moderate wage growth and domestic activity. Inflation is expected to remain around the middle of the RBA’s target band through the year to 2015-16 as depreciation in the exchange rate flows through prices.
- Growth, particularly nominal GDP, projections are highly sensitive to fluctuations in commodity prices through the impact on terms of trade. Treasury’s updated sensitivity analysis to iron ore prices indicates that a US$10 per tonne reduction/increase results in just over a 3 per cent fall/rise in the terms of trade, a 0.8% reduction in nominal GDP and a $2.1bn revenue hit in 2015-16.
- Treasury is forecasting that weaker commodity prices will drive a fall in the terms of trade by 8½% in 2015-16. From 2016-17 the terms of trade is expected to remain broadly flat assuming a modest recovery in some commodity prices and a waning currency impact on import prices.
General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited.
Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz