The 2018/19 Australian Budget

 

 For a visual overview of the Budget , click here

 

With an eye to the next federal election, the Coalition was faced with the following Budget objectives: counter the populist appeal of Labor’s big-spending budget promises and win over voters; win approval from populist cross-bench senators to pass key tax reform legislation; placate rating agencies by delivering an improved budget trajectory over the forward estimates; place the larger portion of income and company tax cuts in the distant future and achieve sustained budget surpluses; and keep to small government principles by capping government tax revenue as a share of GDP.

In achieving these objectives, the Budget treads a fine line between fiscal consolidation and growth-stimulating (but costly) tax-cuts and other benefits, with the estimated total increase in tax receipts of $25.9 billion over the forward estimates being split evenly between policy initiatives and improving the deficit and reducing debt. The split between policy initiatives and debt consolidation spreads the improvement in tax receipts between growth-enhancing policies, such as personal income tax cuts and aged care benefits, and reductions to the economy-wide cost-of-capital flowing from improved Federal government finances. Rating agencies Moody’s and Fitch have endorsed the Budget and Standard & Poor’s has given conditional approval. All three have retained their AAA rating of the sovereign.

The centrepiece of the Budget is a three-stage Personal Income Tax package. Under the first stage, low- and middle-income earners receive a tax offset of up to $530 per annum commencing in 2018/19. In the second stage commencing 1 July 2022, the tax thresholds are amended, with the main change being that those earning between $90,000-$120,000 face a marginal rate of 32.5% instead of 37%. In the final stage, the 37% tax bracket is eliminated, such that all earners between $41,000 and $200,000 face a marginal rate of 32.5%. The cost of the package is a modest $13.4 billion over the next four years, but with more significant changes coming through stages 2 and 3, the 10-year cost of the plan is a much larger $140 billion.

As always, there are winners and losers from this year’s Budget. Among the winners are: (i) tax payers, with middle- and low-income earners to receive a tax offset in the nearer term, with higher income earners benefiting in the longer term; (ii) older Australians, whose pension loans scheme is expanded, with the pension work bonus allowing pensioners to earn up to $300 per fortnight without reducing their pension payments and with 14,000 more high-level home care packages; (iii) superannuation account holders, with exit fees banned, insurance now optional and fees capped at 3% for small account holders and the ATO reuniting small inactive accounts with active accounts; (iv) health, with $1.4 billion for new and amended medical items listed on the Pharmaceutical Benefits Scheme and $33.8 million for mental health services; (v) small businesses, with a year extension of the $20,000 instant asset write-off; (vi) Great Barrier Reef, with approximately half a billion dollars with be allocated to protecting the reef; (vii) craft beer, with concessional draught beer excise rates to apply to smaller kegs used by craft brewers; (viii) airport security, who will receive $297 million to improve screening and security arrangements; (ix) students living away from home, who will have more chance of attaining youth allowance, with the Parental Income Test threshold being increased to $160,000; (x) infrastructure, particularly in Victoria, where $7.8 billion is allocated to Infrastructure projects in the State, including $5 billion for the Melbourne Airport Rail Link.

Among the losers are: cash users, where cash payments made to businesses will be limited to $10,000 so that payments above this level can be more easily tracked either through digital transactions or cheques; (ii) new migrants, who will be required to wait four years, compared to three, to access some welfare benefits; (iii) smokers, as an illegal tobacco taskforce will be set up to remove sellers of tobacco in the black economy; and (iv) businesses undertaking R&D, where reform of the research and development tax incentive package will result in stricter criteria on the release of benefits.

Some commentators have expressed concern that the economic outlook, underpinning the Budget, is overly optimistic. Treasury’s economic assumptions are a little on the high side of expectations, but well within the distribution of likely outcomes. Moving from Treasury forecasts to slightly less optimistic Consensus Economics forecasts makes little difference to the fiscal outcome. However, a significant slowdown could reverse the move to surplus. According to Treasury’s sensitivity analysis (contained in the Budget Papers), a 10% fall in non-rural commodity prices alone would add around $2.1 billion to the 2018/19 deficit wipe out the surplus in the 2019/20 Budget turning it into a deficit of over $3 billion.

The most significant feature of this Budget is the progression towards a revamped Australian tax framework, that (i) seeks to address issues of fairness in the personal income tax system as well as the issue of bracket creep, (ii) seeks to improve Australia’s competitiveness in international capital markets through company tax cuts and (iii) seeks to limit the size of government in the long run by introducing a tax-to-GDP cap of 23.9%. Clearly, many of the initiatives contained in this Budget will not be passed by the Government given the current composition of the Senate. These will no doubt form a key part of the debate in the lead up to the next election.

 

Table 1: Financial market movements, 3 - 10 May 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,723.1

3.5%

US

2.96%

1.6 bps

US Dollar Index (DXY)

92.65

0.3%

Nikkei 225

22,497.2

0.1%

Japan

0.05%

0.8 bps

USD-JPY

109.40

0.2%

FTSE 100

7,701.0

2.6%

UK

1.43%

4.0 bps

GBP-USD

1.352

-0.4%

DAX

13,022.9

2.6%

Germany

0.56%

2.5 bps

EUR-USD

1.192

-0.6%

S&P/ASX 200

6,118.7

0.3%

Australia

2.77%

-3.6 bps

AUD-USD

0.753

0.0%

Source: Bloomberg

 

 

For the economic update by region, click here.

 

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