Market Watch

We discuss what you should expect from the Federal Budget 2018.

Tomorrow sees the release of the final Federal Budget of the current sitting Parliament. Should one expect an election Budget rather than a mid-election cycle one?

There is plenty for the Government to offer up to the electorate. The below is what to look for in the release. 

How ‘good a shape’ is the Budget in?

As of the latest estimates (February data), the Budget is likely to be up to $10 billion better off than the estimates of that in the Mid-Year Economic and Fiscal Outlook (MYEFO). 

This better-than-expected forecast boils down to the following:

  • Higher tax collections. The boom in employment in 2017 has not only seen more people returning to the workforce, but it has meant more people are paying income tax than originally forecasted. The consensus estimate has this adding approximately $3 billion in additional tax revenue. 
     
  • On the corporate side, the final run-off of tax losses from the GFC, coupled with increased profits in 2017, is likely to see an additional $4 billion in additional tax revenue for corporates for 2017/18.
     
  • Global commodity prices have pushed resource revenues and net exports through the roof thanks largely to China and a global economy finally return to pre-GFC levels. Just consider iron ore. For the first three months of 2018, a new record print in iron ore exports was reached. Now, for every average $US1 a tonne over the MYEFO estimates, it’s estimated it will add an additional $250 million to the Budget bottom line. The MYEFO estimate was $US66 a tonne. The latest average in iron ore is $US69 a tonne since January 1.
     
  • Coal, copper and gold have also seen record export numbers this year, an upside for the deficit. 

Given all this additional revenue, we could see the following outcomes:

  • The predicted Budget surplus being brought forward to 2019/20 rather than 2021/22.
     
  • The announced deficit could be as low as $13 to $14 billion (consensus estimates is for a $16 to $17 billion deficit). Considering the net exports of the first quarter, I suspect this could be a bright spot for the government.

The proposed Medicare levy hike of 0.5 per cent is the one thing that could have made the Budget even stronger. However, as mentioned, this is an election Budget, and carving out $20 billion in extra taxes does not make political sense. 

The electoral carrots  

So, with revenues on the up, spending expectations are also peaking and the recent ‘leaks’ have the hallmarks of a spending Budget for ‘jobs and growth’.

The three areas of note:

  • Tax cuts. They will happen. Questions clearly remain around how big (or small) they will be, and if they will be staggered over time. The latter is very likely. The leaks indicate a small, but poignant, tax cut from July this year that will build up over the next decade. It is also very probable that the Government will target middle Australia, meaning, the biggest cuts are likely to be seen in the $37K to $87K brackets – some suggest these brackets could be shifted up by as much as $5000, or we might see rates drop as much as 2 per cent for each band.
     
  • Infrastructure. We already know $5 billion has been earmarked for the Melbourne Airport rail link and the upgrade of the M1 corridor in south east Queensland, however, these require the states to get on board. Infrastructure is likely to be a cornerstone for the Government narrative around ‘jobs and growth’ – expect election-sounding commentary here.
     
  • Other items. Although small in nature, we have already seen ‘touch’ events like the Great Barrier Reef fund, and $50 million dedicated to developing Australia’s entry into the space race. Tweaks to pensions and the PBS are also probable. 
     

The question from all of this is, can the government walk the fine line between fiscal responsibility and an election? We will find out tomorrow night at 7.30pm AEST. 


Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles