Following the release of the 2014–15 Budget, we note the following implications for the economy:
- Mild drag on growth—the Budget looks for a substantial shrinking of the deficit—from 3.1% of GDP in the current year, to 1.8% in 2014–15 and 1.0% in 2015–16. But this is only a mild ramp-up of policy tightening (0.1% of GDP in 2014–15, 0.3% in 2015–16) compared to what had already been laid out. While there is indeed a range of new savings measures in the Budget, a lot of this is offset by new ‘spending’ (on both the revenue and expenditure sides).
- Lower household income—a budget repair levy, changes to Family Tax Benefits, fewer benefits to job-seekers, the reintroduction of fuel excise indexation, a range of other initiatives spanning medical and senior citizens and an increase in higher education costs will all play a part in reducing household income. While these changes are more a 2015–16 story than 2014–15, the sum of the above changes is roughly 1% of household consumption in 2013, a sizeable figure. Thus, it is expected to have an impact on consumer sentiment and spending.
- RBA required to support economy—the pressure on the RBA to increase interest rates will ease with this budget as it provides support for housing.
- Repeal the resources tax and the carbon tax—if this is achieved, it would deliver a mild boost for miners, and for carbon-emitting companies (e.g. steel, building materials, transport). It should be noted that all of the above measures will need Senate approval, which may not be straight-forward.
- Paid parental leave and a tax cut from small companies—the paid parental leave scheme will put some money back in consumers’ pockets. It is to be funded by a 1.5% levy on the profits on large companies. At the same time, the Government will lower the corporate tax rate by 1.5%, leaving the overall tax rate unchanged for large companies. Smaller companies thus enjoy a tax break.
- Lifting infrastructure spend—a combination of new funding and an asset recycling initiative (to encourage states to sell assets and reinvest) is expected to lift infrastructure spend by over $600m in 2014–15, and ~$1.5bn in subsequent years. This could provide support for contractors and building material companies.
Impact on the market
The tough budget was well flagged so it is likely that is has been absorbed by the market at this point and market action would suggest this is the case. From our portfolio perspective we see the infrastructure spend as having a positive impact on Lend Lease and Macquarie Bank, the likely impact on interest rates as being favourable for Stocklands and Dulux and the changes to the Medicare co-payments having a negative impact on Sonic Healthcare (albeit we do not think the impact will be substantial).