Last night’s Budget essentially uses the expected proceeds of a stronger economy to deliver smaller near-term Budget deficits, a return to surplus (albeit a very modest one) one year earlier than previously thought, an earlier-than-expected peak in the Commonwealth’s net debt position, and some politically useful pre-election income tax cuts.
To be fair, economic conditions in Australia have improved. Employment growth has been very solid, with last year’s surge in full-time jobs particularly welcome. And commodity prices have been better than the expectations that underpinned earlier Budget forecasts. If we exclude the policy changes announced in this Budget, expected tax receipts would have been higher by $25.9 billion over the four years to 2021-22 compared to the forecasts in last December’s Mid-Year Economic and Fiscal Outlook (MYEFO). The government has managed to bank at least some of that windfall. However, with an election that must be called sometime before May 2019, a large chunk of it is set to be returned in the form of higher infrastructure spending (an extra $24.5 billion over the next decade) and income tax cuts.
The income tax cuts will be implemented in stages over seven years. The first phase provides a tax offset for low and middle income earners, payable when they complete next year’s tax return. For middle income earners, there are adjustments to tax thresholds to offset bracket creep. From 1 July 2024 (yes, that is a long time away) the number of income tax brackets will reduce from five to four, with the removal of the current 37 per cent bracket. Taxpayers will face the same marginal tax rate for incomes between $41,000 and $200,000, with the top marginal tax rate of 45 per cent remaining for incomes above $200,000.
The cost of the income tax cuts sounds substantial ($13.4 billion over four years), but are worth just 0.02 per cent of GDP in 2018-19 and 0.2 per cent of GDP in 2019-20: not enough to significantly boost GDP growth or change the outlook for inflation and interest rates.
The near term economic forecasts underpinning the Budget forecasts are reasonable. The Treasury is forecasting a modest acceleration in growth over the forecast horizon. Last year, we described the Treasury’s forecasts for a significant acceleration in wages growth as a little hopeful – a view that was widely held at the time. This year assumes a slightly more modest (and more realistic) pick-up in wage inflation.
Fiscal policy inevitably has to balance political and economic policy considerations, and this Budget is no different. Given that household income growth has been relatively moderate – particularly given the very modest rate of wage inflation – giving some near-term relief to low and middle income earners has some policy merit beyond just political necessity. However, despite the improvement in the Government’s Budget position, there isn’t much margin for error. Any renewed weakness in commodity prices – particularly for iron ore and coal – or if wage inflation fails to materially pick-up and the return to surplus could easily be delayed again.
The Budget does contain some measures that will impact (both positively and negatively) Sunsuper employers and members. However, it’s important to remember that the Federal Budget rarely makes any difference to the way Sunsuper or indeed any other major superannuation fund invests your money. From an investment perspective, it’s the medium to long term outlook for the Australian and world economies, inflation, interest rates, corporate earnings that are critical in determining what kind of investment returns our members will achieve, and tonight’s budget, like virtually all of its predecessors, has very little impact on those factors.