Budget 2013 – honey, who ate the surplus?

The Federal Budget is hardly the most riveting document you are ever likely to read. Sure you know it’s important, but the problem is that it’s a huge document with countless facts, figures and tables. And when it comes to analysis, economists seem to be writing for other economists; and accountants writing for other accountants.

It’s always important to remember that it is just a budget, the same that any household or company would prepare. Assumptions are made; forecasts are taken; and events can change!

For instance the first forecast for the 2012/13 budget outcome was made in May 2009 and a deficit of $28.2 billion was projected. By May 2010 that estimate had changed dramatically to a projected surplus of $1.0 billion. But the deficit for the twelve months to February was just under $38 billion and the latest estimates project a deficit near $19 billion for the current financial year.

To see CommSec’s Budget Chart Pack, click here.

But at the end of the day most people want to know what’s in it for them. It doesn’t matter whether you are a student, pensioner or CEO of a major company.

First things first

• This year (2012/13) the budget deficit is tipped to hit $19.4 billion (1.3 per cent of our economy or GDP). Last October, a surplus of $1.1 billion was expected.
• Next year (2013/14) a deficit of $18.0 billion (1.1 per cent of GDP) is expected.
• The budget is expected to return to balance (actually a small surplus of $849 million) in 2015/16.
  Revenues are tipped to rise by 7.3 per cent in 2013/14 while real spending is tipped to rise by 4.3 per cent.
  Net government debt is expected to peak at 11.4 per cent of GDP in 2014/15 .Previously net debt was to peak at 9.6 per cent of GDP. Whichever way you cut it, debt is low on a global perspective.

Did the Government get it right?

• This is the last Budget by a minority Government before the Federal Election. So we were never going to get first-best outcomes. In fact if the Government had a choice, it probably wouldn’t be handing down a Budget at this time. Better that the election was out of the way and decisions could be made with a view of the longer term. Given the choice, it is unlikely that the Coalition, Greens or independent members would have opposed a decision to hand down a Budget after the election was out of the way.
• So in many respects this is a housekeeping Budget by the Government. Still, the Budget also showcases many longer-term initiatives such as Education reform and the National Disability Insurance Scheme. The current Government has sought to leave a legacy – whether it is returned to power or not. It also allows the Government to claim that its focus is not just on the short term but on the longer-term prosperity of the nation.
• Of course budgets are always a mix of politics and economics. That is a given. The Government of the day has its priorities and agenda and these are reflected in budget strategies, decisions and outcomes.
• Clearly one of the clear stand-outs from this Budget – especially when you compare it with last year’s statement – is the absence of a Budget surplus. In fact the Budget is not expected to return to surplus for at least another three years.
• But it was always going to be difficult to conjure up a surplus in the current financial year – it would have been the biggest turnaround in the Budget bottom line in over 50 years. But it was always the intention to reduce the size of the deficit that was most important, not the desire to produce a surplus (and a wafer-thin surplus at that).
• This year the Government has rightly done away with the single-minded focus on surpluses. In its place is a desire to balance the budget, live within our means and improve social infrastructure.
• So certainly this is a less “flashy” budget than last year, with the claim that the budget will return to surplus quickly and further that small surpluses will be achieved in the out-years. But this is where the Government gets it right – setting a path to surplus but not achieving it in a hurry. That is, aim to ensure that the economy continues to grow, thus lifting tax revenues and therefore gradually chip away at the deficit over the next three years.
• The key initiatives of the Budget are certainly not new but have been announced, telegraphed and or previously thrashed out. These include the Gonski education reforms; the national disability insurance scheme – DisabilityCare Australia; and the increase to the Superannuation Guarantee levy. There is more spending on health and infrastructure.
• But there are a few nasties as well. The $5,000 baby bonus will be scrapped. The Government won’t proceed with the proposed increase to Family Tax Benefit A.
• So overall, this is a less “flashy” Budget – very much a house-keeping or ‘workman-like’ Budget. Just ahead of the election it is not time for controversial, visionary decisions. Rather it is a time to portray the Government as a caring but economically responsible manager of the nation’s affairs.

What does it mean for Australia?

• This Budget is very focussed on investment, and not just on the usual economic infrastructure like roads, but also social infrastructure such as health, provision of a disability insurance scheme and education.
• The Government continues to focus on reducing the size of the budget surplus but the path is clearly flatter than that projected last year. In fact the net impact of budget decisions will actually increase the size of the budget deficit this year by $2.35 billion and lift the coming year’s deficit by $286 million. Where the Budget is expected to have an impact is on the out-years, from the 2014/15 year.
• So austerity is ‘out’; rather the focus is on maintaining economic growth, ensuring that the very needy are supported while laying a groundwork for future social initiatives.
• Overall then the Reserve Bank is not given fresh ammunition to cut interest rates. Not only has fiscal policy become more neutral in the short term, but the Aussie dollar has weakened, thus supporting businesses, and there are more encouraging signs for the global economy – especially in the US, China and Asia.

Who are the winners?

• Schools: Commonwealth funding of $9.4 billion over six years
• Farmers: Concessional government loans worth around $420 million to help farmers restructure their debts.
  The disabled: the 0.5 per cent rise in 1.5 per cent Medicare levy to pay for the national disability scheme, raising about $3.3 billion.
• Defence: spending increases slightly to $113 billion over the four years.
• Pensioners: can sell their long-term home and invest up to $200,000 without affecting their pensions.
• Drivers along the East Coast: $4.1 billion over a decade for upgrade work on the ageing Bruce Highway in Queensland and Federal, NSW government to each contributed $400 million to commence building the $3 billion tunnel linking F3 and M2 motorways in Sydney.
• Single mothers and the unemployed on Newstart will be allowed to earn an extra $38 a fortnight, up to $100, before their benefits are scaled back.

Who are the losers?

• Tax Payers: deferral of second round of tax cuts.
• Families: The increase to Family Tax Benefit A worth a total of $1.8 billion for 2013/14 is to be scrapped.
• Expecting families: The baby bonus is expected to be axed from March 2014 and replaced with a $2000 Family Benefit Part A payment for the first child or $1,000 for the second or subsequent child – which will cut out for those on household incomes above $110,000.
• University students: changed payment structure for fees, scholarships and deductions including Student Start-up Scholarships as income contingent loans, rather than as grants. Total government saving of more than $2.5 billion.
• Public servants: $580 million of cuts to the public service over the forward estimates.
• Big business: crackdown on large company, multi-national tax minimisation schemes generating $4.2 billion of savings over the next four years. Monthly instalment payments (PAYG) for large taxpayers including trusts, superannuation funds, sole traders and larger investors generating $1.4 billion of savings over the next four years.
• Smokers: cost of standard packet of 25 cigarettes rises by 7 cents.

Impact – Rates, $A, Shares
Interest rates

• Fiscal policy has been contractionary but now can be regarded as neutral to slightly contractionary. That is the budget deficit has been reducing over the past year and further modest reductions are expected over time. Certainly the Reserve Bank acknowledged that “ongoing fiscal consolidation” is “likely to weigh on growth over the next year or so.” As a result the Reserve Bank cut rates last week and it will continue to lean in favour of further rate cuts.
• So to a large extent fiscal policy settings are already factored in by the Reserve Bank. As a result we think other factors will be more instrumental in prompting the Reserve Bank to cut rates again. For instance if the Australian dollar remains historically high, domestic economic growth softens from the rate currently assumed, or there is new deterioration in the health of the global economy. Still, the Aussie dollar has softened recently and the outlook for the US economy is brightening. If those developments continue then no change in rate settings would be necessary.
• The recent rate cut by the RBA was part of co-ordinated action by global central banks to lift growth. European and US policymakers may seek further assistance to boost global growth. As a result, we are currently pencilling in a 25 basis point rate cut in August.

Australian dollar

• We don’t believe there are major implications for the Australian dollar from decisions made in the latest budget. Still, that has been the case for probably a decade now.
• While fiscal policy has been contractionary, monetary policy has remained accommodative. The interesting point is that the Reserve Bank recently noted that “The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time.”
• The next few months could prove interesting for the Aussie dollar. Global central banks have been cutting rates to lift global growth. At the same time the US economy has strengthened, leading to more chatter amongst Federal Reserve members about a scaling back of stimulus (quantitative easing). As a result the US dollar has recently attracted some support, putting downward pressure on other currencies (such as the Australian dollar). If that process continues, businesses in those countries where exchange rates have been strong (like Australia) will receive some relief.
• We expect the Aussie dollar to hold between US96c to US107c over the next year.

Sharemarket implications

• Retailers: Mildly negative, cuts to family welfare payments, reduction in the baby bonus and increase in the Medicare levy will reduce discretionary household funds. Over the near term growth is likely to be subdued with a modest rise in the unemployment rate. But Treasury expects consumer activity to pick up as low interest rates and growth improves over the medium term. Household spending growth of 2.5 per cent is tipped in 2013/14 and 3.0 per cent in 2014/15.
• Transport & Construction: Committing to the next wave of infrastructure investment of $24 billion – over six years should support construction and transport stocks.
• Finance: Local banks are expected with tougher rules flagged for locally-based, low-taxed banking units that sell their services to overseas customers.
• Stockbrokers: A ban on a strategy known as ‘‘dividend washing’.’ The strategy, used by domestic investors, allows them to effectively double the tax break they receive from franking credits.
• Healthcare: Negative for GP funding. We rate this budget as relatively more negative for Primary Health Care than Sonic Healthcare, given its bulk billing model and relatively larger earnings exposure to medical centres. Slightly positive for pharmacy wholesalers, Ramsay Health Care. If the government forecast for PBS growth come to fruition, there are upside risks to listed wholesalers Sigma Pharmaceutical and Australian Pharmaceutical Industries.