AuthorMichael Scott

Budget 2019

Paving the way to an election
Treasurer Josh Frydenberg has delivered a ‘back in the black’ Budget aimed squarely at voters, stressing the Morrison Government’s commitment to financial discipline and low taxes.

As expected, the Treasurer signaled sweeping tax cuts and major infrastructure spending if the Coalition wins the upcoming federal election widely expected to be held in May.

This largesse is made possible as the Budget heads towards surplus for the first time in 12 years. Extra revenue has flowed into the Government’s coffers from a surge in company tax on the back of higher commodity prices, and a higher personal tax take as more Australians find work.

The Big Picture

The Federal Budget is all but balanced. The Government expects a small underlying Budget deficit of $4.2 billion this financial year, unchanged since the mid-year Budget update in December, before moving to a $7.1 billion surplus in 2019-20.

The Budget’s big spending promises come despite a worsening economic outlook over the past six months. The Treasurer forecast growth of 2.25 per cent this year rising to 2.75 per cent in 2019-20 and 2020-21, slightly lower than the 3 per cent forecast in the mid-year update.

Growth could also suffer from a cut in the permanent migrant intake from 190,000 to 160,000 a year. The Government predicts current net debt of $370 billion will fall to 18 per cent of GDP in 2019-20 and be wiped out in 10 years.

Bigger tax cuts

The centerpiece of the Budget is an extension of the already announced multi-year tax package. Low and middle-income workers will receive immediate income tax relief of up to $1080 for single income families and up to $2160 for dual income families from 2018-19.

By 2024-25, 94 per cent of taxpayers on incomes below $200,000 will pay no more than 30c tax in the dollar. Incomes above $200,000 will pay 45c in the dollar.

The Low and Middle Income Tax Offset (LMITO) will almost double from $530 to a maximum of $1080 a year for people earning between $48,000 and $90,000, to be received after people submit their 2018-19 tax return. People on income below $37,000 will receive an offset of up to $255.

The popular instant asset write-off for small business has been increased from $25,000 to $30,000 a year, extended to businesses with turnover up to $50 million (previously $10 million) and will apply as of 2 April 2019. This allows small and medium size businesses to deduct the cost of assets such as cars and equipment.

Major infrastructure spending

The Government’s other signature spending initiative is a $100 billion boost to infrastructure spending over the next decade, an increase of about one third on last year’s Budget.

This includes $2 billion for a fast rail link from Melbourne to Geelong. The Government will also co-fund five business cases with state governments for fast rail from Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast and will build on projects already underway.

There is also a $3 billion increase (to $4 billion) in the Urban Congestion Fund, including $500 million for a commuter carpark fund.

A further $1 billion will be invested to improve the Princes Highway in NSW, Victoria and South Australia, with additional funding for road and rail projects in all states and territories.

Beefed up regulation and compliance

In the wake of the Banking Royal Commission, financial regulators Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) will be given a boost of more than $550 million to clamp down on misconduct.

The Australian Taxation Office will be given extra funds to crack down on welfare cheats and tax dodging.

Healthcare and welfare

The Government has pledged $527.9 million for a Royal Commission into the abuse of people with disabilities. It has also recommitted to fully funding the National Disability Insurance Scheme, but a slow take-up of the NDIS has delivered a $1.6 billion saving to the Budget’s bottom line and contributed to the projected Budget surplus.

In response to the national crisis in mental health and youth suicide, $461.1 million will go to prevention and treatment programs.

The creation of a new $337.2 million drug strategy to address harmful opioid use, improve family support services and increase capacity of drug and alcohol services in remote and regional areas.

The cashless welfare card will be extended to all the Northern Territory and Cape York communities in Queensland at a cost of $129 million.

Aged care services will receive a further boost of $282.4 million to fund 10,000 new home care packages and increasing home care supplements for dementia and cognition.

Superannuation sweetener

In a bid to help older Australians boost their retirement savings, the Government intends allowing 65 and 66-year-olds to make voluntary contributions to their super from 2020-21 without meeting the work test.

The same group will also be allowed to make three years’ voluntary non-concessional (after tax) contributions, currently capped at $100,000 a year, in one year.

Education

There are no big-ticket announcements for schools or universities, but $453 million will go to extend pre-school education in the year before school.

The focus instead is on a new $525.3 million skills package to provide vocational education and training that will fund 80,000 new apprenticeships and double incentives to employers to $8000 per placement.

Training hubs will be established in 10 regional areas with high youth unemployment.

Environment and energy

The Government hopes to shore up its climate and energy credentials with $3.5 billion for a new Climate Solutions Package, including $2 billion for the Climate Solutions Fund (previously called the Emissions Reduction Fund).

Pensioners, carers and veterans will receive a one-off cash payment to help with energy bills. The Energy Assistance Payment is worth $75 for singles and $125 for couples.

It has also previously announced $1.4 billion for Snowy Hydro 2.0 and a $56 million Battery of the Nation in Tasmania.

Regional communities will receive $6.3 billion in drought support and $3.3 billion in flood support. A $3.9 billion Emergency Response Fund will be set up to help with future natural disaster efforts.

National security

There will be a continued focus on national security, with $512.8 million for the Australian Federal Police and $58.6 million to the Australian Security Intelligence Organisation.

The Government will also spend $34.8 million over four years to counter foreign interference.

Looking ahead

This is an unusual Budget as there will be little chance of legislating most of the spending measures before a federal election in May.

The biggest risk to the Budget forecasts for growth is the falling property market and concerns that it could flow through to the broader economy. According to CoreLogic, national house prices are down 7.4 per cent since their 2017 high, with most pundits predicting further falls this year.i

Monetary support could come from the Reserve Bank which announced yesterday the official cash rate will remain on hold at a record low of 1.5 per cent while also signaling it is prepared to cut rates this year to support growth if needed.

For its part, the Government’s proposed tax cuts and other stimulus measures could provide the kick the economy needs to get people spending, companies hiring and flat wages rising.

Labor has flagged it will deliver its own economic statement later this year if elected. We will have to wait until after the election to see whose policies will take Australia forwards.

https://www.corelogic.com.au/news/housing-downturn-loses-some-steam-corelogic-national-home-value-index-down-06-march

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

 

Happy New Year

Investors started 2018 full of hope, with the global economy and financial markets in good shape, but by year’s end they were uncertain and a little anxious about what lay ahead. Markets responded with last minute falls across all asset classes.

The issues that weighed heavily at the end of 2018 were the unresolved trade dispute between the US and China, confusion over the final Brexit deal, rising US interest rates, falling oil and commodity prices and the US government shutdown. Australians were also distracted by political instability and falling house prices in Sydney and Melbourne.

With so much focus on what may, or may not, lie ahead, it was easy to lose sight of the solid progress we’ve made.

Positive economic growth

The global economy grew at a steady clip of 3.1 per cent. However, the World Bank estimates global growth will ease slightly to 3 per cent this year and 2.9 per cent in 2020 as central banks remove monetary stimulus in place since the financial crisis.i

The US economy continued its strong recovery with growth of 3 per cent in the year to September.

China’s growth slowed to 6.5 per cent, still remarkably strong by global standards but its lowest since 2010, as the effects of its trade dispute with the US begin to bite.ii

Australia enjoyed steady growth of 2.8 per cent in the year to September as we notched up a world-beating 27 years without recession. Corporate profits are at record levels, inflation is a tame 1.9 per cent and unemployment fell to 5.1 per cent. While wages growth of 2.3 per cent was an improvement, it’s still well below the 20-year average of 3.25 per cent.

Yet consumers remain cautiously upbeat. The Westpac Melbourne Institute rose a percentage point over the year to 104.4 – anything over 100 is regarded as optimistic.iii

 

Australian Key Indices as at
31 December 2018
Share Markets (% change)
Jan – Dec 2018
GDP annual growth rate* 2.8% Australia ASX 200 -6.9
RBA cash rate 1.5% US S&P 500 -6.5
Inflation 1.9% Euro Stoxx 50 -14.0
Unemployment 5.1% Shanghai Composite -25.5
Consumer confidence index 104.4 Japan Nikkei 225 -12.1

 

*Year to September 30, 2018 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Focus on interest rates

The Australian dollar fell 10 per cent in 2018 to finish at US70c, due largely to US dollar strength and a widening of the gap between local and US interest rates. High US interest rates increase the global cost of borrowing and boost the value of the greenback.

The US Federal Reserve lifted rates four times to 2.5 per cent but indicated there may be only two more hikes in 2019, rather than three as previously forecast, due to the slowing economy. By contrast, Australia’s cash rate finished the year where it started at 1.5 per cent.

At the other end of the yield curve, US 10-year government bond yields were barely changed at 2.7 per cent, reflecting market fears of economic slowdown. Yields on Australian 10-year bonds eased to 2.3 per cent.iv

Falling commodity prices

The lower dollar is good news for our exporters and should soften the impact of falling commodity prices which have been caught in the cross-hairs of trade wars and fears about an economic slowdown.

Iron ore was down 3 per cent to US$71.50 a tonne while oil, copper, aluminium, zinc and nickel prices dropped between 16 and 19 per cent. The one bright spot for local producers was wheat, up almost 20 per cent.iv

Sharemarket correction

Global sharemarkets retreated as the year came to an end, with the MSCI World Index down 10.4 per cent on a world of worries.v

US shares fell 6.5 per cent, their worst annual performance in a decade. In Europe, UK shares fell 12 per cent with no Brexit deal in sight while political and economic uncertainty also weighted heavily on share prices across the Eurozone. In Asia, Chinese shares suffered the heaviest losses (-25.5 per cent) while the Japanese market fell 12 per cent.iv

Australian shares tapped into the global mood, with the ASX 200 down 6.9 per cent, its worst year since 2011. However, when you add dividends the total return from shares was down just 3.5 per cent, and closer to zero after franking credits are taken into account.vi

Property market loses steam

The heat came out of Australia’s residential property market in 2018, with big falls in Sydney and Melbourne dragging the national market down 4.8 per cent according to figures from CoreLogic.vii This is the biggest annual fall in a decade and follows tighter lending practices, rising supply, higher mortgage interest rate and falling investor demand.

After rental income is included, the annual return from property was down 1.2 per cent.

It was a case of the further they rose, the harder they fell. Sydney (-8.9 per cent) and Melbourne (-7 per cent) were hardest hit, while Perth (-4.7 per cent) and Darwin (-1.5) were also in retreat. Prices continued to climb in Hobart (8.7 per cent), Canberra (3.3 per cent), Adelaide (1.3 per cent) and Brisbane (0.2 per cent).vii

Looking ahead

The late market reversals of 2018 were driven by gloomy expectations rather than the reality of solid economic progress. Future performance will depend on US interest rates, the resolution of trade tensions between the US and China and, to a lesser extent, the negotiation of a workable Brexit.

In Australia, uncertainty will persist until the Federal election is out of the way. Then investors can get back to focusing on fundamentals such as our solid economic growth, a strong corporate sector, resilient consumers, low interest rates and more affordable housing.

i World Bank, 5 June 2018, http://www.worldbank.org/en/news/press-release/2018/06/05/global-economy-to-expand-by-3-1-percent-in-2018-slower-growth-seen-ahead

ii Trading economics, as at September 2018, https://tradingeconomics.com/china/gdp-growth-annual

iii Westpac Melbourne Institute, 12 December 2018, https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/2943036/PressReleaseCSI20181212.pdf

iv Trading economics.

v Financial Times, 1 January 2019, https://markets.ft.com/data/indices/tearsheet/summary?s=MS-WX:MSI

vi Year in Review 2018, CommSec Economic Insights, 2 January 2019

vii CoreLogic, 2 January 2019, https://www.corelogic.com.au/news/australian-dwelling-values-fell-48-through-2018-marking-weakest-housing-market-conditions-0