It’s Beginning to Look a Lot Like…An Election is Coming.
The Morrison government released its first budget overnight and the first for Treasurer Josh Frydenberg. As budgets go, there was nothing particularly sensitive that has the potential to have a big impact on financial markets in the near term. In fact, with the federal election around 6 weeks away, this budget was all about the beginning of the Coalition’s election campaign.
Many of the announcements that were made may not even see the light of day if, as the polls suggest, the Coalition loses. To this extent, it may well be the first time that the Budget response from the Opposition has the potential to carry more weight from a market perspective. Thus, this Budget is a classic election Budget, promising further spending on areas such as health, aged care, education and infrastructure, while provisioning for further personal income tax cuts. One positive was there were minimal changes announced around superannuation, with many of the proposed amendments outlined to the market prior to the Budget.
In terms of the key outcomes from Budget 2019 we would make the following comments:
- After a decade of deficits post the GFC, the Government expects that the budget will return to surplus in 2019/20. While having a budget surplus is good and affords the government increased flexibility in the advent of a further slowdown in the domestic economy, as a percentage of GDP, the surplus will be less 0.5% in year 1 rising to around 1.75% of GDP by 2028/29. Hardly massive. In addition, with financing rates so low, the need to aggressively maintain a surplus in the near term is less relevant for the government in our view.
- At a headline level, the tables below provide a quick snapshot of both the revenues and spending proposed by the Government over 2019/20:
- Infrastructure continues to be a big winner. In addition to a further A$100bn spend on infrastructure projects over the next 10yrs (with NSW set to be the biggest beneficiary) the government has also given the green light to the Snowy 2.0 Hydro scheme, committing a further A$1.4bn to the project.
- In terms of tax, the Government provided some relief to low- middle earners with the (LMITO) Tax Offset. In addition, the minimum tax threshold will increase to $45,000 (in 2022/23) and the 32.5% bracket to $120,000. The government also announced that the 32.5% threshold will move to 30% in 2024/25 tax year. Whether this ever gets there remains to be seen, but it does provide some ammunition by which to tackle its election campaign and provides greater relief than what has been currently proposed by the Opposition.
- Small business had some further concession as it related to instant write-off provisions. In addition, the government continued to push its small business agenda, knowing that this sector will be a key battleground during the election, particularly as it relates to Labor’s “Minimum Living Wage”, with the potential for higher costs for small business. In addition to small business, the Government will provide further drought assistance packages (A$6.3bn) throughout the country as well as additional flood relief (A$232mn) to affected areas.
- Superannuation measures were relatively modest, with the 40-hr work test to be scrapped for those aged 65 and 66 and who make voluntary contributions to super. This is scheduled to rise to 67yrs by 2023 and will align with the work test eligibility criteria. The government will also increase the age limit on spouse contributions from 69yrs to 74yrs.
- Social security funding will get additional support as it relates to Partner Serve Pensions and the governments home support program will receive additional funding. Additional one-off support in areas such as energy assistance payment etc will provide further assistance around cost of living expenses.
- The final aspect of the Budget dealt with additional funding for and implementation of all 76 recommendations post the Hayne Royal Commission (RC). While we have already seen a widespread industry imposed reaction to the RC, the move by the government does highlight the sensitivity of ensuring that confidence in the financial services sector is critical to a successful and well-structured domestic economy.
Overall, we believe this is a Budget that is aimed squarely at the upcoming Federal election. We do not expect it to have any impact on financial markets, consumer or business confidence in the near term. While there are some definite election sweeteners, many remain several years down the track and, with the potential for a change of government, may not be legislated. So, buckle up, as it is going to be an interesting ride over the next 6 weeks.
Piers Bolger is Chief Investment Officer at Viridian Advisory