Treasurer Scott Morrison has delivered a 2017–18 budget that projects a deficit of $29.4 billion, worse than the $28.7 billion projected at the December 2016 mid-year economic and fiscal outlook (MYEFO). However, a number of proposed revenue raising measures sees the government reaffirm a return to surplus in 2020–21, now projected to be $7.4 billion.
In terms of economic forecasts, reaching a surplus still depends on a rosier outlook for the economy in the coming years, given the budget projects GDP growth picking up to 3.0% in 2020–21 (last read 2.4%); wage growth to 3.0% (last read 1.9%) and the unemployment rate declining to 5.5% (last read 5.9%).
Ord Minnett senior investment analyst Sze Chuah briefly discusses below the key proposals announced in this budget.
- This budget should be politically more palatable to voters than the last, and will neutralise a lot of Labor’s barbs, but doesn’t change the macro implications significantly.
- The annual pace of fiscal consolidation is broadly unchanged, estimated at 0.6% of GDP. Further tightening may still be required, given that the return to surplus relies on some generous economic assumptions, and some of the proposed savings may fail to get Senate approval. This means there is still a risk of a downgrade to the AAA sovereign rating, and an implied burden on the RBA to reduce rates if necessary. Retail spending is unlikely to get much reprieve either from this budget.
- On balance there were no major surprises in this budget, given most had been flagged ahead by media outlets in the lead-up. As discussed in our budget preview note last week, our main areas of concern centred around how rolling back billions of dollars in previously proposed saving measures would be funded to keep to the timeframe of returning to surplus; how optimistic the economic variables would stay; and whether there would be enough support in the senate. The latter two remain contentious, but in the last 24 hours it has become clear that the major banks will plug a significant amount of the funding gap with a $6.2 billion levy being applied on their liabilities. The private health sector, which we thought could be a possible target has, largely been unscathed...for now.
Key proposals, and the winners from the budget appear to be:
Infrastructure: allocating $75 billion to infrastructure spending over the next ten years, including building Sydney’s second airport, potentially acquiring Snowy Hydro from NSW and VIC, road infrastructure in WA, and a $10 billion national rail program. It appears around $14 billion of the $75 billion has so far been committed.
Healthcare: all up a $10 billion investment in healthcare over four years, including a $2.2 billion cost to the Government from progressively lifting the indexation freeze on Medicare rebates and re-instating bulk-billing incentives for pathology and diagnostic imaging services; and $2.8 billion in hospital funding. The Medicare levy will increase by 0.5 percentage points from July 2019 to 2.5% to close the National Disability Insurance Scheme (NDIS) funding gap.
Housing-linked funds in superannuation:
measures include allowing first home buyers to make voluntary contributions into super of up to $15,000 per year ($30,000 in total), taxed at a concessional rate, in order to save a deposit for a house. Over-65s can also make a non-concessional contribution of up to $300,000 into their superfund from the proceeds of the sale of their principal home.
Energy security: includes providing funding to prove up gas pipelines proposals from Western Australia and the Northern Territory to South Australia.
Key proposals, and the losers from the budget appear to be:
Banks: new mandatory reporting requirements, more competition oversight by ACCC, and a 6bps levy imposed on the liabilities, i.e. deposits, of the four major banks and Macquarie Group from 1 July 2017 will raise $6.2 billion in the next four years.
Housing affordability: measures ultimately aimed at improving affordability by growing supply, unlocking surplus Government land banks, and tightening foreign investment by re-introducing a 50% cap on the amount of new developments sold to foreign investors, removing CGT exemptions on foreign-owned properties of main residence, and applying an annual levy of at least $5,000 on properties kept vacant for more than six months each year.
Energy costs: Funding ACCC to police competition in retail electricity and gas market.