Kinder, gentler Budget?

The Federal Budget will be focussed on the short-term imperative of rebuilding confidence and the longer-term goal of increasing participation in the workforce. In the current environment it is far less important to focus on the goal of moving the budget back into surplus.

What does it all mean?

• The short-term goal of the Federal budget should be to build confidence. Last year confidence was badly knocked around by the rhetoric of “Budget emergency” and “End of the age of entitlement.” A government should go hard in its first budget, but in an environment of weaker-than-normal economic growth and global uncertainties, it probably went a little too far.
• So the goal of this budget is different – much more carrot, and less stick. The budget deficit still needs to be reduced over time, but – like any business – the smart way is to focus on restraining costs at the same time as boosting revenues. It is much easier to reach the goal of surplus if the economy is growing at a 3.5-4.0 per cent annual rate than 2.5-3.0 per cent.
• The longer-term goal is the same as it has been for some time – pushing ahead with the PPP policy to combat the challenges of van ageing population. PPP is increased labour market participation, increased productivity, and increased population growth. It is an under-stated policy, but has characterised budget policy for a decade.
• And that basically is it. The budget deficit needs to be reduced over time, but if interest rates need to be slashed to zero to offset contractionary fiscal policy then this is nonsense. And hopefully the ratings agencies understand this. There have only been 19 budget surpluses in the past 65 years (average deficit 0.9 per cent of GDP)

Whatthe media has reported on or speculated about so far (AAP, ABC, News Corp, Yahoo7)

• Childcare reforms: The aim is to get mothers back to work. And to do this, the cost of childcare has to come down and measures need to be implemented to lift childcare places. Changes not expected until 2017 and phased in.
• A new cervical cancer test. It will replace the existing two yearly pap smear and instead be required once every five years.
• A tax cut for small business. Tax cut of 1.5 percentage points; other small business incentives expected.
• Assistance in funding fund a new national cancer screening register. Total assistance for cancer totalling $600 million.
• Dental health care: additional $200 million funding.
• Pensions: Change to pension eligibility tests. Expected that 3.5 million pensioners not affected; over 171,000 pensioners will receive a lift in pensions while over 235,000 will see a cut in pensions.
• Bank deposit tax: A 0.05 per cent tax on bank deposits in excess of $250,000.
• University students: “Expat students to pay back HECS fees even if they are living overseas.’
• Aim to secure more tax from multinationals: “integrity measures to make sure multinationals pay their fair share of tax.”
• Pharmaceutical Benefits Scheme: “Over the counter medicines including aspirins scrapped from PBS, saving $3 billion. Savings to be redirected to the $20 billion medical research future fund.
• Netflix tax: “GST will apply to Netflix and other downloads for the first time, increasing prices by 10 per cent.”
• Economic stimulus package for drought-hit regions in Queensland and NSW.
• Extension of funding for medical health services
• Legal aid: “Funding of $25.5 million over two years has been reinstated to community and Indigenous legal centres.”
• Assistance for terminally ill: People diagnosed with two years to live will now be able to access their superannuation.

State of the budget and economic assumptions

• In the twelve months to March 2015, the budget deficit stood at $48.9 billion (around 3 per cent of GDP) – the lowest rolling annual deficit in six months. The Department of Finance notes that the deficit is actually $4.2 billion below the ‘profile’ forecast to date due to lower cash payments.
• In 2013/14 the budget was in deficit by $48.4 billion or 3.1 per cent of GDP. The Government currently expects a deficit of $40.4 billion for 2014/15 (2.5 per cent of GDP).
• The Reserve Bank currently expects economic growth of 2.25 per cent in 2014/15, 2.25 per cent in 2015 and between 2-3 per cent in 2015/16. Underlying inflation is expected to be between 1.75-2.75 per cent through to June 2017.
• The CBA Group expects a budget deficit of $36.6 billion in 2015/16 (Bloomberg survey average $40 billion; range $28.0-49.3 billion.) Economic growth is tipped at 3.2 per cent in 2015/16 after 2.50 per cent in 2014/15

What is the importance of the Budget?

• The Federal Budget is handed down on the second Tuesday in May each year. The Budget sets down the Government’s spending and taxing priorities.

What are the implications for interest rates and investors?

• The budget won’t be in surplus any time soon, but the path to surplus will be restated. The Federal Government will hope to rebuild consumer and business confidence and therefore get Aussies to embrace the extraordinary accommodative economic settings. But much will depend on the Opposition parties in the Senate. Opposition parties will be held up to scrutiny in they oppose just for the sake of opposing.
• If the Government is successful in dulling the angst in economic debate, then the Reserve Bank’s record low 2.00 per cent cash rate has more chance of working. Absent of surprises, the Federal Budget is unlikely to have any impact on the Aussie dollar or the sharemarket.

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