The National Australia Bank, in their assessment of the 2018-19 budget, described the government’s commitment to a tax to GDP ratio of 23.9% as “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.”
On the infrastructure spend, they point out that two thirds of the $75 billion came from previous announcements and, of the new funding, “Much of this is back ended and some may not go ahead (e.g. the Victorian Government has not committed to matching funding of the $5bn Melbourne to airport rail link).”
The “modest” personal tax cuts for 2018-19 “are unlikely to add much to growth” and the company tax cuts, should they go ahead, “in the short term really involves a switch from corporate to personal taxes (given our imputation system). Hence in many macro models the impact of corporate tax cuts on domestic demand are generally found to be relatively small.”
They “remain somewhat sceptical about the [surplus] projections – if nothing else there is clearly an ‘election cycle of promises’ still to go” and a $21bn Contingency reserve to fund it.
“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.”
Despite Scott Morrison’s assurances that they will no longer need to borrow to fund recurrent expenditure, the NAB says “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.”
While the bank sees infrastructure spending, non-mining business investment and, in the very near term, LNG exports adding to growth, they “still worry about the consumer who we expect will remain very cautious.”
“Going forward we see limits on how much more consumers will be willing to run down savings. As a result we still see consumer caution in the face of higher electricity prices, low wages growth, stalling/falling house price wealth and high debt levels.”
Businesses, on the other hand, are doing well.
“While business conditions remain at very high levels (trend conditions of around +19 vis long run averages of +5.5) business continues to use better profits to pay down debt and balance sheet strengthening.”
The Business Survey “continues to point to a strengthening labour market – with growth in jobs around 24k (or more) for at least the next 6 months” and unemployment falling to around 5 per cent by year’s end – though they warn that is dependent on the participation rate not continuing its “puzzling rise.”
ScoMo would have us believe the improvement in projections is due to their sound fiscal management and their restraint. The bank thinks otherwise.
“The improvement in the underlying cash balance in 2018-19 and 2019-20 is entirely due to parameter changes – principally revenue. This reflects in part the flow on effects of higher commodity prices to mining sector profits, but also more general strength in business activity and employment growth. In contrast, policy decisions detract from the underlying cash balance in each year… while the forward estimates have a degree of spending discipline from 2019-20– it is noteworthy that growth in spending in the prior three years is more rapid… the real expenditure constraint in the Budget is from 2020/21 onwards.”
The only new announcement for the childcare and education sectors was “an additional $247 million over four years from 2018-19 to extend the National Schools Chaplaincy Programme.”
The only contribution to affordable housing was “$550 million over the five years starting 2018-19 to improve access to housing for Indigenous residents in remote Northern Territory.”
The bank was silent on the lack of any funding to address climate change and the continued freeze on Foreign Aid, inexplicable decisions considering the existential threat posed by the former and the national security benefit of the latter. When will big business get on board about the economic benefits of these essential investments in our future in this region?
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