Via the excellent Damien Boey at Credit Suisse:
With an election looming, we were expecting the FY20 budget to contain plenty of sweeteners and stimulus. Indeed, we were expecting the LNP to draw the ALP into more stimulus, bringing forward the increment to growth in the minds of investors. But we were wrong.
We highlight that:
- The FY20 projected fiscal surplus is larger than expected, at $7.1 billion, or 0.4% of GDP. Notionally, the swing to surplus from deficit in FY19 represents a tightening of financial conditions, but for the fact that the trade balance has lifted, boosting private sector saving and government coffers.
- Officials have revised down their real GDP growth forecasts to 2.75%. We expect the RBA to follow suit, but announcing more downgrades in its May Statement on Monetary Policy. Indeed, in yesterday’s meeting statement, RBA officials were happy to reference their inflation forecasts, but not their GDP forecasts, suggesting that they are distancing themselves from overly-optimistic, and out-dated numbers.
- Tax relief is disappointing. On paper, expansion of low and middle income tax offsets to eligible households should be worth around $7.1 billion in FY20. But in the accounts, the stimulus in FY20 is only worth $750 million. How do we get such an order of magnitude difference? For one, the cited tax cuts between $255-1080 per annum for eligible households includes what they are already getting from policies in place. The incremental tax cuts are worth roughly half of the headline amounts, taking the gross number down to around $3.5 billion. But the second issue is bracket creep. Access Economics estimates that bracket creep in FY20 could be worth around $3.7 billion. Netting this out from the numbers, there is actually no stimulus – unless the Treasury has assumed a considerably smaller bracket creep number, which it appears to have done.
- Infrastructure spending plans are underwhelming. Funding for the 10-year infrastructure plan has been boosted by $25 billion. But annualized, the increment is quite small. Indeed, major infrastructure investment initiatives for FY20 amount to only $716 million.
