Westpac: Budget stimulus “modest”

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Forget the big headlines, say Westpac:

The 2019 Australian Federal Budget confirms that the underlying cash balance is set to return to surplus in 2019/20. This follows 11 consecutive years of deficit and will be the first surplus since 2007/08, ahead of the GFC impact. The surplus for 2019/20 has been upgraded by $2.9bn since the December Mid-Year Economic and Fiscal Outlook (MYEFO), revised from $4.1bn to $7.1bn. There is an improved starting position for the budget relative to MYEFO (of some $11.3bn across four years) which is used to fund relatively modest new spending. Net debt peaks in 2018/19 at 19.2% of GDP, or $373.5bn, a relatively manageable level.

Budget profile – little changed from MYEFO
The profile for the budget position for the years 2018/19 to 2021/22 is not greatly different from that in MYEFO. Across the four years to 2021/22, the cumulative change to the budget position relative to MYEFO is an upgrade of only $1.3bn.

The government estimates that the budget deficit in 2018/19 will be $4.2bn, which is a $1bn improvement on that expected in MYEFO. The budget is then expected to move into surplus in 2019/20, to the tune of $7.1bn (a $2.9bn upgrade on MYEFO). The surplus widens to $11.0bn in 2020/21 (a $1.5bn deterioration relative to MYEFO) and then increases to a $17.8bn surplus in 2021/22 (a $1.2bn deterioration). The 2022/23 year now rolls into the projection period, with the surplus expected to narrow to $9.2bn.

The budget – an improved starting position
The starting position for the budget has improved relative to that in MYEFO. Across the four years 2018/19 to 2021/22, the starting position was upgraded by a cumulative $11.3bn. The bulk of this was in the initial two years, $4.0bn and $5.7bn respectively. An undershoot on expenditures is the main driver of this improvement. Revenue is upgraded in the 2018/19 year, by some $3.0bn, but is largely unchanged for 2019/20, and in the following years has been downgraded by almost $4bn in 2020/21 and by $5.5bn in 2021/22.

New policy – boosts spending, but only modestly
The stronger fiscal position has given the government the flexibility to boost spending and lower taxes. Since MYEFO, the net impact of new policy measures costs the budget some $9.9bn across the four years to 2021/22. This is a relatively modest boost to spending across four years in the context of a $2 trillion economy. The focus is on increased expenditure over these years, up a total of $10.5bn. Additional money for infrastructure is one of the key priorities in the 2019 Budget – see pages 2, 3 and 4 for additional details around the key themes and key measures.

The net impact of new measures is: $3.0bn in 2018/19; $2.7bn in 2019/20 (representing only 0.1% of GDP); and then $2.8bn in 2020/21. In the additional year of 2022/23, new measures cost $3.4bn – with a greater focus on tax cuts, worth a net $2.5bn (with $4.5bn for income tax cuts).

Net debt – remains manageable
The Federal Government’s net debt position remains manageable. Net debt increases from $342bn (18.5% of GDP) at June 2018 to an estimated $373.5bn (19.2% of GDP) at June 2019. Net debt levels are then expected to decline progressively over the forecast period, moderating to $326bn (14.4% of GDP) by June 2023.

Risks
Risks to the economic and fiscal forecasts abound, as is always the case. In recent years, including in this budget update, the starting position for the budget has surprised to the high side, with revenues tending to be higher and expenditures tending to fall short of forecasts.

We see both upside and downside risks to the economic forecasts, which are discussed in more detail on pages 5 and 6. In summary, output growth for Australia was marked lower in the 2019 Budget in the wake of the sharp slowdown over the second half of 2018. However, in our view, the forecasts may still be on the optimistic side. As to commodity price forecasts, which flow through to national income and the nominal size of the economy, the budget appears to be overly cautious – mainly on the iron ore price (assumed to be US$55/t free on board – albeit moderating to that price over the year ahead).

The medium-term economic forecasts, as we have noted previously, are by construction, on the optimistic side. They assume that real GDP growth is above trend, year-in year-out, until the output gap is closed.

The upcoming Federal election represents an additional risk to the budget outlook with the potential (as with all elections) for a bidding war to emerge. The election is due to be held by May 18, with reports suggesting that it will be held on May 11 – with the announcement to be made by Sunday April 7. If correct, this provides only limited time over the next couple of days to legislate the new measures announced in this budget.

Therefore positive for bonds, so far. But what will really matter is what Labor does, via The Guardian:

Labor has taken issue with the centrepiece of the Morrison government’s budget, declaring the Coalition’s proposed tax rebate for workers on low and middle incomes gives a smaller tax cut to two million Australians earning less than $40,000.

Pointing to the direction of Thursday’s budget reply from Bill Shorten, the shadow treasurer, Chris Bowen, said the government’s proposal, which gives voters on incomes between $50,000 and $90,000 a rebate of $1,080 if the Coalition wins in May, was less generous to workers on incomes below $40,000 than Labor’s offering.

“Labor will fix this and give these working people the tax relief they deserve,” Bowen said on Tuesday night.

The government moved on Tuesday night to neutralise Labor’s more generous tax relief for low and middle income earners, first unveiled by Shorten last year, by doubling the low and middle income tax offset in its pre-election budget.

According to the budget papers, the government’s proposal would give workers earning between $22,000 and $40,000 a rebate of $255. Labor says its proposal for this income cohort was a rebate of $350.

Not a material difference in terms of stimulus but let’s wait and see.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.