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Expected economic impact of the Budget

Brian Parker, Chief Economist

Last night’s federal Budget forecasts a surplus of $7.1 billion in 2019-20, after what is forecast to be an eleventh consecutive deficit of around $4.2 billion in the current fiscal year ending 30 June 2019. Both figures are an improvement on the forecasts issued just prior to Christmas in the mid-year economic and fiscal outlook (MYEFO). 

While the Australian economy slowed significantly in the second half of 2018, and wages have continued to fall short of previous Budget forecasts, the government has nevertheless enjoyed a substantial windfall from higher commodity prices – most notably iron ore and metallurgical coal – and the fact that employment growth has been significantly stronger than reflected in previous Budget forecasts. Government outlays have also been lower than expected, partially due to lower than budgeted spending on the National Disability Insurance Scheme (NDIS). 

Whether the Budget’s forecasts for a return to surplus next year actually become reality remain subject to the vagaries of the Australian and global economic outlook, as well as the outlook for a range of key export prices. The recent weakness in the economy wouldn’t appear to justify a more aggressive path to surplus in any case. The economic forecasts that underpin the Budget numbers are mostly reasonable. The recent boost to revenue from higher iron ore and metallurgical coal prices is not projected to last, with the Treasury prudently assuming a return to more normal levels over the forecast period. Perhaps more worrying is that while unemployment rates are expected to remain at around 5%, wages are still expected to accelerate to an annual growth rate above 3% over the next two years. Regrettably, this still looks too optimistic, unless significant progress is made in reducing what are still quite high levels of underemployment in the economy. 

The Budget effectively gives back much of the boost to revenues from stronger employment growth and commodity prices in the form of tax reductions and spending initiatives, including a previously flagged boost to infrastructure spending, between 2018-19 and 2022-23, with the most significant tax cuts not coming into effect until 2022-23. In the near term, however, the low and middle income tax offset (LMITO), announced in last year’s Budget, will double to a maximum of $1,080 per year, and will be payable after the lodgement of this year’s tax returns. Given the weakness in consumer spending in the face of falling house prices and only modest wages growth, the boost to the LMITO is welcome and likely to be almost entirely spent.

The Budget does contain measures that will impact (both positively and negatively) Sunsuper employers and members. However, with an election due to be called imminently, exactly how much of last night’s Budget actually gets implemented remains to be seen. It’s also important to remember that the federal Budget rarely makes any difference to the way Sunsuper or indeed any other major superannuation fund invests members’ money. From an investment perspective, it’s the medium to long-term outlook for the Australian and world economies, inflation, interest rates and corporate earnings that are critical in determining what kind of investment returns our members will achieve, and last night’s Budget, like virtually all of its predecessors, has very little impact on those factors.