From Goldman today:
In our view, there is nothing particularly alarming in today’s update – with no further blow-out in government expenditure, some success in legislating previously promised savings (A$22bn), a lower forecast peak in net debt (as a % of GDP), and a very conservative assessment as to how a much higher terms of trade might be expected to flow through to corporate tax revenues.
It is this latter factor in particular where we believe the Government’s approach has been extremely conservative – leaving a great deal of scope for a meaningful
upgrade to forecast revenues in the lead up to the May Budget. Note, for example:– Firstly, that following upgrades to the outlook for commodity prices, today’s update features a +12.75ppt upgrade to Treasury’s terms of trade forecast for FY17 (now +14%), which is only partially unwound in FY18 (-3.75%). Even so, company tax receipts have been revised -A$1.1bn lower than at PEFO – despite sensitivity analysis by Treasury at the time that a permanent +10% rise in non-rural commodity prices would add no less than A$4.8bn to company taxes over a two year period.
– Secondly, in contrast to Treasury’s forecast increases in the corporate tax take in FY17 (+8.1%) and FY18 (+14.4%), BBG consensus forecasts for the ASX300 firms at a micro level are currently for much larger increases in tax paid, especially over FY17 (+24.7% and +8.1% respectively over FY17 and FY18).
– Thirdly, at a macro level, Treasury’s mix of economic forecast changes also speaks to stronger (not weaker) corporate profits. Specifically, while wages – a key input cost for companies – have been revised lower, both private final demand, the terms of trade and nominal income growth (in net terms) have all been revised higher over FY17 and FY18.
In turn, from the perspective of the corporate tax take, the implications from today’s changes are that either: i) losses carried-forward will prevent a significant increase in mining profits from translating to higher taxes, and/or that ii) profits in the nonmining economy will be especially weak. In our view, the impact from these forces look to be significantly overstated – as does the implied downside to the personal income tax take (given that wages growth was revised only -25bp lower in each of FY17 and FY18).
…From a political strategy point of view, doing enough to maintain the AAA rating in the near term positions the Government well to present a much more upbeat set of numbers in the far more detailed annual Budget Report in May 2017 – and particularly if our Commodity team’s bullish outlook for bulk commodity prices plays out.
It’s certainly a good thing to be conservative with one’s estimates and politically sensible as well. But, this upside depends very much upon sustained commodity prices which is not the likely outcome. Indeed the prices for all three bulks have very likely peaked already and will march downwards from here.
That process will probably not be complete before the 2017/18 Budget but the trajectory will certainly be clear so the forward estimates will again become a tortured component of the budget for ratings agencies if the budget again assumes high prices.
SocMo has been conservative about the 2016/17 budget but not conservative enough farther out and that means he will be forced, sooner or later, to again downgrade his outlook and let go his 2021 non-core surplus resulting in the loss of the AAA rating.
From my perspective, ScoMo bought a little time at the expense of later credibility loss. Sounds like the sort of thing a real estate agent would do.
