Australian Budget 2018/19: Increased infrastructure spending - NAB

Analysts at NAB explain that as expected, the centrepiece of Australia’s latest Budget is increased infrastructure spending (currently put at 24.5bn over 10 years), reductions in both personal and company tax and the Baby Boomer package (aimed to allow pension aged residents to fund their retirement in their own homes).

Key Quotes

“Also we have the government committing to a tax to GDP ratio of 23.9% (likely to be triggered by around 2021/22).  The latter is largely political but probably means that without significant spending restraint (unlikely in our view) future surpluses will be marginal. Hence there is little to no room for the Budget to adapt to any economic downturn while retaining the projected surplus – and indeed little macro policy flexibility.”

“The government has brought forward its projection of a return to surplus in 2019/20 (really a flat outcome given the uncertainties) and a small surplus in 2020/21. At this stage we remain somewhat sceptical about the projections – if nothing else there is clearly an “election cycle of promises” still to go. In the “Medium Term Economic Outlook” our view is that the Budget implies a further slight weakening of the current structural tightening in the next few years (and we don’t really return to structural - as against a nominal- surplus for some time- i.e. post 2020/21). Put differently revenue continues to be the main driver of the Budget and the medium term surpluses rely on more strict expenditure control than anything we have seen recently.”

“Overall we don’t see this Budget as a big spending pre-election give away. That means the Budget will provide scope to spend more - and both sides of politics will almost certainly do so. The Contingency reserve is around $21bn.”

“Fiscal Outcome

The underlying cash deficit is expected to fall from $33.2bn in 2016-17 to $14.5bn in 2018-19, then achieving a tiny surplus in 2019/20 (ahead of schedule but…) and  building to near 1% of GDP in the out years.”

“Economic Outlook

Our GDP forecasts are around 2¾% over the next two years moving down to 2.6% in 2019/20 - while the Treasury numbers are 2¾% in 2017/18 and around 3% beyond that. Our profile sees infrastructure spending and business investment (especially for non-mining) adding to growth – as will, in the very near term, LNG exports. However, we still worry about the consumer who we expect will remain very cautious. As noted above we are marginally more cautious on wages and nominal GDP in 2019/20.  And hence the surplus result in 2019/20 should really be seen as “flat”- a lot of water has to go under the bridge before we get to the surplus.”

“Financial Markets

There was little discernible market reaction to the Budget.  S&P has so far maintained its negative watch on Australia’s AAA rating. Equally it will be interesting to see how much further spending will be rolled out in the election cycle.  Already it has been confirmed that there will be a “Women’s” Budget in the spring.”