A post-budget bonanza

This week in Talking Finance:

• Chris Richardson, Partner from Deloitte Access Economics shares his thoughts on Treasurer Josh Frydenberg's first budget;
• Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital tells me if the budget has had any impact on the markets;
• Michael Pachi, National Political Editor for Macquarie Media gives his take on what Bill Shorten is likely to say in his budget reply speech tonight; and
• Tim Lawless, Head of Research at CoreLogic Asia Pacific tells me the latest movements in house prices.

Hello, and welcome to Talking Finance, I’m Alan Kohler.  Well, Treasurer, Josh Frydenberg, handed down his first and his only budget a few days ago.  Yes, I know, they could possibly win the election and he could have another budget, but I don’t think so.  I think that Frydenberg is going to be a single budget man, and that was it!  And it wasn’t all that exciting was it, really, but I guess that’s what happens when you’re only five weeks from an election and you need to keep a bit in the war chest to keep the voters interested over the next five weeks.  Anyway, to digest it all and give us a good analysis of the budget I talk to Chris Richardson, who I think is the best budget analyst in the country.  He’s a partner at Deloitte Access Economics and has analysed countless budgets over the years.

Also, Shane Oliver, for the impact on the markets and what he thinks of the budget.  Michael Pachi talks to us about the politics and what Bill Shorten’s likely to say tonight and there’s also my monthly chat on how house prices are going with Tim Lawless, Head of Research at CoreLogic, Asia Pacific, and he’s got a few thoughts on the budget as well.

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And now here’s Australia’s best budget analyst, Chris Richardson at Deloitte Access Economics.  Well, Chris, what’s your overall view of the budget?

CR:  The most dangerous budgets, the ones where mistakes get made and Australians I think look back and regret, are the ones ahead of elections or the ones where the economy gives the budget and the politicians some wriggle room.  This one had both those characteristics.  You had a bit more money, and of course, we have an election in the offing.  Given that I thought the budget was relatively responsible, it was not a full on splash the way some other budgets have been.

It was interesting your March Budget Monitor had a heading, ‘Budget makes wine from the economy’s tears’, which suggests that you’re an INXS fan, Chris?  You must be, it’s a line from ‘Never tear us apart’, and the point you were making, I think, was the economy is getting worse, but the budget’s getting better.  I guess, you’d have to say that that was correct because you predicted a surplus for next year of $5.7 billion and it turned out to be, or they predict it’s going to be $7.1b.  So was that a surprise to you?

CR:  No, though the shape of how the economy ended up helping the budget was perhaps the most interesting thing.  If you sit back and you tick off the big things that happened:  They cut taxes, spent more mostly on infrastructure, also known as ‘pork barrelling for bush’, ended up with slightly better surpluses and did all that despite the fact that Treasury said over the four years in total, the economy would be smaller, national income would be lower than Treasury’s own forecast from a few months ago in the budget update issued ahead of Christmas.  The trick there, the thing, if you like, that held it all together is although Treasury said the economy will be smaller it was saying that there were a bunch of good news trends in the economy having an impact on spending.

The biggest number, and arguably the least reported number in the budget, wasn’t the extra $19.5 billion of tax cuts over the next four years, it was that Treasury and Finance said other things equal, trends in the economy were going to save $28 billion over four years from expected spending.  Not because of any decision by the government, but simply because of revisions in the underlying trends on a whole bunch of programs.

What were the details?  Where does that $28 billion come from?

CR:  It falls essentially into four buckets.  All over the world economies, not just Australia – growth is showing up relatively more in profits and in jobs than it used to and relatively less in wages.  If you pause for a moment and think, all right, relatively less in wages, slower wage growth also means slower inflation. Almost every program that the federal government pays for is indexed one way or another to wages or prices and so when we’re in a world of lower inflation that starts to show up as a chunk of savings on spending.  This classic pattern in the economy, and again, not just Australia, and again on budget night, what did Treasury do?  They revised up profits, they revised up jobs and they revised down wages and prices.  That wage and price impact was a saving.  So too, if you had less inflation, by and large, interest rates are lower and you saw that come through very much in markets over the last month or so, and Australia now has $360 billion of net debt, so lower interest.  There’s another saving.

Or jobs, of course, we’re getting more jobs and in particular, that means more jobs from people who don’t already have jobs.  You’re seeing record numbers of older Australians in work that saves money on a bunch of welfare programs.  You’re seeing students, they’re still being students, but they’re working more than before, so they’re qualifying for less government support than before.  One last thing, lower wages means less consumer spending.  That and the fact that the boffins in Treasury have just written in a pretty large downturn in housing construction, means a lot less GST.  Of course, in the Australian system, less GST is actually also less spending because we hand that money to the states.

Your analysis would be that basically the savings that Treasury has forecast over the next four years have not been fully committed?

CR:  Yeah, and if you like, these underlying trends, and again, it’s not just Australia, it’s all around the world, this more in profits, more in jobs, less in wages, it’s slowing through spending in a bunch of ways.  In our budget analysis for many, many years we used to have to line, ‘revenues make or break budgets’.  But we yanked that a while ago.  It used to be true that the big ups and downs were in revenues.  You’re increasingly starting to see the economy have a bigger impact on spending and it was fascinating to see the biggest number in the budget and again, arguably, the least reported was the savings flowing from this sort of changing shape of the economy, if you like, following through to the government.

Fascinating, thanks very much Chris.

CR:  Thanks, Alan.

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Now for his take on the budget, here’s Shane Oliver, Chief Economist and Head of Research at AMP Capital.  Shane, were there any surprises in the budget for you?

SO:  No, there weren’t really any major surprises, mostly initiatives that were talked about in the budget had been leaked beforehand.  The tax cuts, particularly the focus on low and middle income earnings, the increase in the instant asset write off – all those sorts of things had really been talked about.  Maybe there was a little bit of a surprise there to the extent that the government was relatively cautious in terms of what it assumed regarding the higher iron ore prices and coal prices, so that was relatively cautious.  But by the same token their growth forecasts were a little bit on the optimistic side, but overall no great surprises.  I wasn’t particularly excited by what I saw in the budget.

Were there any implications to the share market or even the property market?

SO:  They were marginal.  There is some help there for the share market.  Obviously when you give cash payments to people it does provide some help for consumer discretionary stocks and also that ongoing spending on infrastructure is good for construction companies.  But that’s probably a one day wonder.  I don’t see a big impact flowing from that.  The real reason our share market did well yesterday, I think the bulk of the reason our market did reasonably well in response to the budget wasn’t so much a response to the budget, it was the fact that regional markets had been going up anyway on ongoing talk of progress regarding US and Chinese trade talks.  That’s really what’s buoyed our market.  But, yeah, there was some minor support in there, but nothing particular.

What about the dollar, is that going to be affected at all by the budget, do you think?

SO:  Well, the initial reaction for the Australian dollar was minimal, in fact it showed very little movement because there wasn’t any surprises in the budget.  It does provide some help for the economy.  If you give cash payments to people, we saw back in the time of the GFC, that a chunk of that will be spent at Harvey Norman and elsewhere.  But by the same token, those payments are one-off, they’re relatively small.  I think again the reason the Aussie dollar managed to push back above 71 cents, which is really has left it in the range it’s been in for some time now, but the reason it’s managed to push back above 71 cents in the last 24 hours is because of that talk of progress on the trade front between the US and China.

One of the points you made in your post-budget note to clients was that the budget continues to recognise that we cannot rely on bracket creep to cut public debt.  Is that because you think that the tax system is already progressive enough?  It can’t be made more progressive and therefore all of the bracket creep has to be handed back in future?

SO:  Well that’s basically it.  There’s a lot of talk about fairness in Australia but the reality is that the top 10% of wage and salary earners in Australia account for 45% of the personal tax revenue flowing to Canberra.  You go back 20 years ago, that proportion was 36%.  That has seen the tax system has become more progressive.  Higher income earners are paying a big chunk of the revenue going to Canberra and in fact the bottom 80% of wage and salary earners in net terms pay no tax to Canberra.  They do pay tax but they get more back via benefits.  It’s only the top 20% who are paying a net amount to Canberra after allowing for taxes and benefits.

We already do have a highly progressive tax system.  We have seen the tax share of income rise progressively over recent years and of course, that was a point made by the Reserve Bank, just last week, that tax paid has been rising faster than wages and salaries.  I think it’s only fair that over time that that should be handed back as, the old concept was bracket creep, we still have that as people get higher wages they creep into the next bracket and end up paying a higher tax rate that was never intended for them. That, I think should be handed back.  What the government really is doing here, all they’re really doing is handing back bracket creep some time during the next decade, and I think that’s entirely appropriate.  If we don’t do that, then the reality is that the tax share of GDP will just keep rising indefinitely and eventually that’s going to have negative impacts on growth in the economy as people lose their incentive to work.

That’s amazing what you just said, I’d never heard that before.  That the bottom 80% of taxpayers, pay no tax in net terms, that they get more in government benefits than they pay in tax, that’s incredible.  I never heard that.  What government benefits do they get?

SO:  These are the averages.  It’s sort of a whole range of benefits, obviously at the very low end, it’s unemployment benefits and so on.  But you’re still getting benefits as you move higher through the tax system.  But the reality is, if you’ve got a situation where the top 10% are paying half of the revenue going to Canberra, if you push it out to the top 20%, and you have to keep pushing up to around 60 or 70% of the revenue going to Canberra is accounted for by the top 20% of taxpayers, once you push out further than that, then the other taxpayers are getting a chunk of benefits coming back the other way offsetting their tax payments.

Now, of course, it’s for the second highest 20%, call them quintile, they’re net status is close to zero but they’re still in net benefit terms.

Bloody hell, all right. 

SO:  In fact, it’s interesting Alan, that this has been pointed out by several studies over the years I think, including the one that was done early in the Coalition’s term, showing that our tax system is quite progressive compared to many other countries.  We do have quite a progressive system.  It’s well known that our top marginal tax rate is relatively high compared to many other OCED countries, comparable countries and also the top tax rate kicks in at a relatively low multiple of average wages compared to where the top tax rate kicks in in other countries.  We do have quite a progressive tax system in Australia.

What did you think of the projections on the economy in the budget?

SO:  Well they have become more realistic, but I don’t think they’re realistic enough.  I think they’re still a bit on the optimistic side, basically.  The growth number’s just a little bit too high.  I’m not in the recession camp in Australia, I don’t think we’ll see one unless something goes wrong dramatically globally, and I think that is unlikely.  But I do see GDP growth for the next year or so being closer to 2% than 3%, therefore I think government’s assumption that growth picks up to 2.75% in the next financial year is a bit too high.  But more importantly, and more significantly, we continue to see relative optimism by government on the wages front and that I think is the main risk here. 

I think one of the budget papers themselves point out that they’ve been too optimistic, their views on wages.  If they’re forecasting unemployment to be stuck at 5%, I just can’t see why wages growth will accelerate much from here, certainly not towards the 3-3.5% that they’re talking about over the next few years.  In fact, the US experience tells us, they had to get unemployment down to below 4% and they had to get their underemployment below 4% as well before they started to get wages growth picking up above the 3% level and I think the same will apply in Australia.  Unless we get unemployment down a lot more, it’s hard to see those wages numbers coming through, which of course, does oppose the budget revenue assumptions.  I guess the flipside is the government was relatively cautious in terms of what they assumed for iron ore and coal prices and so there might be some offset there and therefore in aggregate terms, I’m reasonably confident they’ll probably be able to achieve those surplus projections, absent any sort of shock globally or significant policy changes from what’s portrayed in the budget.

Great to talk to you, Shane, thanks.

SO:  Thanks, Alan.

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[Parliament audio clip]

Now for the politics of its, here’s Michael Pachi, the National Political Editor for Macquarie Media.  Michael, a few leaks this morning about Shorten’s budget reply that he’s going to trump Morrison’s tax cuts.  What do you think he’ll do?

MP:  Well, look, I do think that they’ll try and say that they’re going to be trumping the government’s tax breaks.  Essentially, this is what they’ve been saying over the last 24 hours or so since the government delivered its own budget saying that there’s nothing there for lower income earnings, that is people on less than $40,000 a year.  It sounds as though the opposition will be delivering some sort of announcement tonight that will help those on the very low end of the scale when it comes to income brackets.  It will be interesting to see what it is that they have to say in terms of delivering some sort of tax relief for people earning less than $40,000, there’s about 3 million people in that income range.  It will be interesting to see how they do it.

It will be interesting to see how they do it.  The other thing that’s going to come out of tonight is a major health announcement.  They’re going to be throwing billions of dollars into the health system.  We’ve got to keep in mind, Alan, when it comes to Labor, issues like health and education really play well for them so it’s not a surprise that they’re going to be spending more money on health, I suppose.  How much more money on health they’re going to be spending and where they’re going to be spending this money on health.  But stuff like that, I do think really does play out well.  But at the same time you’ve had the Deputy Labor leader, Tanya Plibersek, hitting the airwaves this morning essentially saying that not only will a Labor government deliver greater tax relief for workers, they’re also planning to deliver a surplus which is greater than what the government plans to deliver.  But whether it actually happens, remains to be seen.

How much of this, do you think, is going to form the basis of the election campaign?  Do you think that the question of surplus and tax cuts and so on is going to be what the election is about?

MP:  I think so and I only say that because the government, since Morrison took on the leadership of the Coalition last year, he’s been really trying to hammer this point that when it comes to the Coalition, they’re best placed to manage the economy and secure our borders.  I don’t think it’s going to be a complicated message from either side of politics.  I think the government wants to really talk about the economy and security, they think that they’re the strengths.  While Labor is about getting out there, talking about health and education, those social issues, but also saying to voters, we are capable of running the economy and managing the nation’s purse strings.

For Bill Shorten, and Labor in general, tonight’s budget reply is all about not only making these few announcements, but also telling people that he’s ready to be the Prime Minister and keep the nation’s budget in surplus and able to manage the economy.  For the government, the election campaign is really going to be very much about saying, we’ve managed the economy well for the past five years, we’re on track to deliver a surplus next year due to some of the tough decisions that we’ve had to make and we also can be trusted and we have credibility when it comes to security issues. 

I do think that the next four or five weeks of the election campaign will all be about the economy and security and delivering these tax cuts.

In fact, nothing unusual about that, the Coalition going on security and economic management, the Labor Party going on health and education. 

MP: No, I think their messaging is going to be very simple to try and cut through.  There’s a lot of noise, and we’ve got to keep in mind, if an election is called either tomorrow, Friday, or this weekend, during that election campaign period there’s a lot of distractions, Alan.  There’s going to be school holidays, there’s ANZAC day, there’s Easter – there’s a lot of distractions.  I do think that both sides of politics are going to want to have very clear simple messages that the electorate can understand when it comes to voting day either on May 11 or May 18.

Which do you think it’s going to be, 11 or 18?

MP:  I think it will be 11, and the only reason I say that is because I think that the government and Scott Morrison probably do want a short, sharp campaign.  They probably don’t want the campaign to go any longer than it has to go.  The only other reason I say that it could be May 11 is because we are hearing anecdotally that the Liberal Party is finding it very difficult to raise money and as you know, Alan, these election campaigns can be very expensive.  Labor can rely on donations clearly from the Unions to prop up their campaign and obviously other organisations like, Get Up, also tend to help the Labor and the left side of politics.  But I think that the Liberals and the Coalition probably in general, is finding it difficult to raise funds to pay for their election campaign.  I think because the Liberals just don’t have as much money as Labor to run their campaign, I think they’re going to want to keep it as short and sharp as possible.

Do you think the Coalition has got any hope at all?

MP:  Look, I don’t.  I think we’ve got to look at the trends of the polls and the trends of the polls are showing that Labor will win the federal election.  The only thing I will say is I don’t think it will be a landslide victory for Labor.  I do think that Labor will win and they’ll win within their own right, but you’ve got people saying, you know, Labor could win 20 seats and this, that and the other. I just don’t see that.  I do think that the polls will tighten as we get closer to election day, but I do think Labor will win.  They’ll win within their own right and I think the Coalition will obviously lose, let’s say, five to 10 seats at the most.  But I don’t think it will be this landslide that everyone’s talking about.  Because I do think, Alan, that when push comes to shove, there are still question marks in voters’ minds as to whether or not they can really trust Bill Shorten to be managing the country and I do think that while the polls are showing that Labor would win the election and win it comfortably, there’s always this question around Bill Shorten’s leadership.

Voters are just not convinced about him yet and I do think that that will feed into sentiment as the election campaign wears on and people head to the ballot box on either May 11 or May 18, as I say, I think it will be more May 11.

Well, good luck in the campaign, Michael, you’ve got a busy few weeks ahead of you, so good luck with that.

MP:  No, problems, thanks Alan.

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Now, to bring us up to date on house prices for the end of March, and also express views about the budget, here’s Tim Lawless, the Head of Research at CoreLogic.  In the March house price release, Tim, we seem to learn that the pace of decline has been easing, but the downturn has become more widespread across the country.  Does that sum it up?

TL:  They’re the two main themes.  Without a doubt, we’re seeing the rate of decline has eased off a little bit.  We’re still seeing Sydney dwelling values falling by nearly 1% over the month, they’re down 0.9%.  Melbourne was down 0.8%.  Throughout December and January, we are generally seeing values in those two markets falling by about 1.5 to nearly 2% month on month.  Still quite a rapid rate of decline, just not quite as bad as what it has been.  But we’re also now seeing some of the markets where value growth has been quite sustainable and housing affordability is way less challenged, like Brisbane, like Adelaide, are also seeing dwelling values drifting lower now.  Which I think is probably a reflection of the tighter credit conditions, particularly for owner occupiers.

Right.  Just focussing on Melbourne and Sydney for the moment, so it’s been pretty steady now, the decline, for quite a long time.  Are you seeing any changes in what’s going on that are worth mentioning?

TL:  Sydney values have been declining since July 2017, Melbourne since about November 2017.  Throughout that period we’ve been seeing the higher end of the marketplace showing the largest declines.  That’s still the case but we are also seeing values falling across the more affordable end of the marketplace as well.  That seems to have just gathered a little bit of pace over recent months in the sense that we have seen first home buyers generally supporting values across those lower price points.  There are some early signs that maybe that level of activity from first home buyers is just starting to fade a little bit.  Remember stamp duty concessions which came into the marketplace back in the middle of 2017, first home buyers jumped on those concessions, an opportunity to save around $25-30,000 on their stamp duty was substantial.  But potentially we’re starting to see fresh signs that that pull forward of demand is just starting to expire a little bit.

Yes, and the fall from peak in Sydney is now 13.9%, where are you at in your thinking about what the fall is likely to end up being?

TL:  We think the rate of decline will probably continue to ease off moderately in Sydney and in Melbourne.  The values are likely to continue falling throughout the rest of the year and probably into early 2020.  I think the fall in Sydney from peak to trough is probably going to be around 18-20%.  But of course, there’s a lot of moving parts.  We’ve got potentially a change of government and a rollback of tax policies, we’ve got potentially lower interest rates and lower mortgage rates later this year.  A slowing population growth and quite a change in Sydney’s interstate migration trends, which are weakening as more migrants flow into Queensland.  A lot of moving parts, and of course, this downturn is very different in the sense that it’s not like previous downturns which have been caused by higher rates or higher unemployment, this is largely about credit.  It makes it much harder to predict where the market’s heading from here.

Yes, it’s not just about credit because the biggest decline, just looking at your data on the latest release, the biggest decline from peak to now, is in the rest of WA which is outside Perth, down 31.6%.

TL:  Yes.

Heavens above, that’s huge!

TL:  Absolutely it is a large decline and on the back of what we saw, a pretty big ramp up during the mining boom.  But yeah, it’s a really valid point you make, this isn’t just about tighter credit and some of those markets, which have had an economic led downturn, Perth and Darwin are probably the best examples of that, but also some of those regional mining dominated areas like the Pilbara in WA, which is largely responsible for that large decline.  But also markets around the Bowen Basin of Queensland, which is more related to coal, of course.  They’ve seen similar falls.  Values have fallen 50-60% since the market peaked out in many of those areas.

Which is I suppose a reminder that there could also be, in the future, some economic impact on Sydney and Melbourne if the economy continues to slow.

TL:  That’s probably the wildcard here is, well how much does the slowdown in residential construction impact on those markets?  We’re seeing both in New South Wales and Victoria, at least, are really the key states responsible for supporting very strong labour market conditions.  Unemployment generally around record lows in New South Wales, and close to record lows in Victoria, and that’s where most of the jobs growth has been as well.  You’re right, potentially a slowdown in economic activity leading through to a reversal of the wealth effect, less consumption and fewer jobs in those markets could certainly disrupt our forecasts.

Did you see anything in the budget that would have an impact on your world, Tim?

TL:  There wasn’t much in the budget around housing.  I think the government seems pretty comfortable with affordability improving organically as values fall.  We can see that obviously the silver lining of values falling is that housing affordability is improving.  But I think the biggest impact in the budget on the housing market will be the record level of infrastructure spending.  Of course, that’s going to be stimulatory, it will help those markets where housing is very affordable to be opened up and connected and make them somewhat more desirable.  And also, the city deals, there’s a few cities around the country which have been targeted to city deals and clearly that upgrade in infrastructure and spending should support those markets as well.

Great, Tim, thanks very much.

TL:  Thanks Alan, good to speak.

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Happy Birthday, Agnetha from ABBA, I won’t even try to pronounce her surname, and she’s turning 69 tomorrow.  Goodness me!  She’s the A in ABBA, if she’s the first or second A, I don’t know, but here’s a little bit of Money, Money, Money, which is appropriate for budget week.

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That’s all from me, have a great week!