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Tanners take - Budget 2017-18

The budget is a seismic shift in the governments thinking on economic policy.

The Prime Minister, the Treasurer and their Cabinet colleagues appear to have put the task of Budget repair on the backburner. The Budget bottom line for the next financial year will come in at a $29.4 billion deficit, which is $3.3 billion further into the red than was estimated in last year's Budget.

Around $13 billion of Budget savings previously accounted for but not passed into law by the Senate have now been dropped by the government. This is a large contributor to the deteriorating bottom line though it has been partially offset by a number of measures, including a new levy on big bank liabilities and a 0.5 per cent hike in the Medicare levy.

The Treasurer announced last night that the Budget will return to surplus in the fourth year 2020-21. This should be taken with a grain of salt, almost every Budget over the past decade has projected a very small surplus in the fourth year, none of which have materialised.

These disparities are largely due to assumptions in the out years which have not held true. On the revenue side, all modeling is done on the expectation that GDP growth will return to 3 per cent per annum within two years, up from the around the 1.5 per cent per annum mark; a figure which has been consistent in Australia since the global financial crisis. And on the expenditure side there is an almost unspoken assumption that expenditure growth can be arrested, yet obstructionism in the Senate has shown this task to be difficult if not impossible.

In the wake of the Budget being handed down last night, both Moody's, and Standard and Poor's have reaffirmed Australia's AAA credit rating. S&P has kept Australia on downgrade watch, where it has remained since mid last year, citing concerns over commodity price futures, growing public debt, the current account deficit  and the Parliament's inability to tackle expenditure growth. Moody's has kept Australia on a stable outlook, but has cautioned that its projections for growth in income and tax revenue is not as optimistic as the Commonwealth's.

One development missed in yesterday's fanfare was the Treasurer lifting the debt ceiling to $650 billion, up from $500 billion. This is being done as the Commonwealth's gross debt on issue is due to surpass the $500 billion mark in coming weeks.

The headline figure on infrastructure investment of $75 billion, forming the centerpiece of the Treasurer's speech last night, is largely a reannouncement of old money. Breaking it down to an annualised figure of $7.5 billion, this is largely consistent with the figures put aside for infrastructure in previous Budgets since the Coalition came to power in late 2013. The major projects announced in this figure, the Western Sydney Airport and the Inland Rail, have already been committed to by the Government and preparatory work has begun, so the market should have already accounted for these investments, although the progress announced last night is a positive. The market will have to wait for more detail on the slated Snowy Hydro 2.0 scheme to explore what opportunities might be presented.

The new bank levy will likely prove to be one of the more controversial measures announced last night, with the early noises from the financial sector that the big banks are preparing for a fight. If implemented in its current form, the new levy will take 0.06 per cent on all deposits more than $250,000 held at CBA, NAB, Westpac, ANZ and Macquarie Banks, generating $6.2 billion over the coming four years. The risk on this measure is the second-order effect of the new levy; whether the banks will shift the new cost onto consumers.

Mutlinationals and tax-shifting regimes have also come into the Government's sights, following the Australian Taxation Office's recent successful Federal Court action against Chevron; recovering more than $300 million in tax revenue. The Government will follow this up by introducing new legislation to further tackle multinational profit shifting, expected to bring in more than $4 billion in additional revenue.

Early soundings from the Opposition and the crossbench are generally supportive of the Treasurer's Budget. Going from these initial reactions, the Parliament may pass most of the measures without the opprobrium the electorate has come to expect in the aftermath of Budgets for the past decade.

 

Mitch Tanner
Senior Associate 

May 10, 2017