The ‘Back in Black’ budget has been delivered by the Coalition on the eve of the 2019 Federal Election. Context is everything and the framing of this budget is for the short term and the election in May. Hardly surprising is Coalition’s desire to assure voters that they are the best choice for managing the economy and the nation’s finances. But are they?
The headline outcome from this Federal Budget is the Government’s surplus of $7.1 billion in 2019-20 and a commitment to deliver budget surpluses from then onwards.
My view is that surpluses over the forward estimates will only be sustained if they are supported by budget repair that addresses the structural misalignment between revenue and expenditure. However budget repair is invariably unpopular with voters and hence has been largely left alone.
Instead we have personal income and company tax cuts being pulled forward as well as energy assistance payments that are considerably expensive. Much of the emphasis of ’getting re-elected’ builds into the Budget’s structure future liability through higher spending and a greater reliance on favourable economic conditions. In short, the ‘back in black’ budget may well revert to being ‘back in red’ down the track.
Of course, the upside for Queensland is that much of the emphasis of getting re-elected has translated into more infrastructure announcements to sure up 12 marginal seats in the Sunshine State. I was actually expecting more but we have done well enough.
Due to the proximity of the Budget to the forthcoming election, this one in many respects is a ‘dead rubber’. Whether the Coalition will be around to action any of the above remains to be seen. Indeed this Budget fulfils the role of a soft campaign launch for the Coalition.
The Australian economy will enter its 28th consecutive year of growth.
Real GDP is forecast to grow by 2.25 per cent in 2018-19 and is forecast to accelerate further to 2.75 per cent growth 2019–20 and 2020-21.
Employment growth will ease from 2.00 per cent in 2018-19 to average 1.75 per cent in 2019-20 and 2020-21.
The unemployment rate is expected to remain at 5 per cent throughout the period to 2020-21.
Inflation is expected to nudge into the RBA target range (2 -3 per cent) with 2.25 per cent in 2019-20 and 2.50 per cent in 2020-21.
Wages growth will accelerate from 2.50 per cent in 2018-19 to 2.75 per cent in 2019-20 and 3.25 per cent in 2020-21.
QEAS comment: These forecasts are plausible as they align with the Reserve Bank of Australia’s view that economic growth is expected to be stronger in 2019-20 and 2020-21. The RBA forecasts GDP growth to increase from 2.5 per cent in 2018-19 to 2.75 per cent in both 2019-20 and 2020-21. Conversely the RBA believes the unemployment rate will fall from 5 per cent in 2018-19 to 4.75 per cent in 2019-20 and 2020-21. Should the economy perform as projected by the Federal Budget we will see Australia’s record run without a recession extend beyond the thirty-year mark.
The Budget’s bottom line is projected to return to surplus in 2019-20 .
The underlying cash balance is forecast to be a deficit of $4.2 billion in 2018-19. An underlying cash surplus of $7.1 billion is then forecast for 2019-20 and the budget will remain in surplus across the forward estimates peaking at a surplus of $17.8 billion in 2021-22.
Payments are expected to decline as a proportion of GDP in each year of the forward estimates from 24.9 per cent of GDP in 2018-19 to 24.5 per cent of GDP in 2022-23.
Receipts as a proportion of GDP will range between 25.0 per cent of GDP in 2018-19 to 25.4 per cent of GDP in 2021-22.
Net debt will peak at 19.2 per cent of GDP in 2018-19 or $373.5 billion before falling to 14.4 per cent of GDP by 2022-23.
QEAS comment: In many respects the predicted budget surpluses depend on a continuation of the healthy economic momentum we have seen over the past several years. The budget position’s improvement has largely been driven by higher revenues resulting from good to great commodity prices delivering boosted royalties, a labour market that has surged personal income tax receipts; and returning profits delivering company tax receipts for the Government. The reality check is that assuming the favourable economic conditions continue it will still conservatively take a decade of surpluses one after another to pay-off the debt (hoped to be in 2029-30).
Major Tax Initiatives
Immediate tax relief for low- and middle-income earners of up to $1,080 for singles or up to $2,160 for dual income families to ease the cost of living;
Lowering the 32.5 per cent rate to 30 per cent in 2024-25 and ensuring a projected 94 per cent of taxpayers will face a marginal tax rate of no more than 30 per cent;
Increasing the instant asset write-off threshold to $30,000 (from $25,000) and expanding to all small and medium-sized businesses with an annual turnover of less than $50 million; and
Fast-tracking the company tax rate cut to 25 per cent by 2021-22 for small and medium‐sized businesses with an annual turnover of less than $50 million and increases to the unincorporated small business tax discount rate to 16 per cent by 2021-22.
QEAS comment: The personal income tax cuts deliberately favour low and middle income earners and will benefit approximately 2 million Queenslanders. It is designed to counter campaigning positioning the Coalition favouring ‘tops hats’ and not ‘hard hats’. This initiative is also hoped to help Australians offset lower wages growth at present. The move to bring forward company tax cuts for businesses with a turnover lower than $50 million is also in part hoped to lead to businesses being in a better position to provide wage increases.
New projects of $4 billion, including:
Bruce Highway $425 million;
Gateway Motorway (Bracken Ridge to Pine River) $800 million;
Warrego Highway $320 million;
Urban Congestion Fund $379 million;
Roads of Strategic Importance (North) $824 million; and
Roads of Strategic Importance (South) $186 million.
QEAS comment: Funding for some of these projects will not be provided for a number of years in effect meaning they will take considerable time for their benefits to be felt by Queenslanders.
Other initiatives that caught my eye
Investing over $525 million to upgrade the vocational education and training (VET) sector. The ‘Delivering Skills for Today and Tomorrow’ package of reforms will:
deliver up to 80,000 new apprentices in occupations experiencing skill shortages through an Additional Identified Skills Shortage Payment;
partner with industry in developing new qualifications to meet the demand for skills in the future through national Skills Organisations;
deliver foundational literacy, numeracy and digital skills across Australia;
connect schools, local industries and young people in areas of high youth unemployment to prepare them for working life, through ten new Training Hubs;
provide vital career and training information; and
drive long-term reform of VET by providing consistent national leadership through a National Skills Commission.
Providing more than $640 million to help restore trust in the financial sector, including:
over $400 million to ASIC to support its new enforcement and supervisory strategies and expanded remit;
over $150 million to APRA to strengthen supervision and enforcement; and
over $35 million for a new criminal jurisdiction of the Federal Court.
Providing $284 million for a one-off, income tax exempt payment to over 3.9 million Australians to assist with their next power bills and cost of living expenses. The payment of $75 for singles and $125 for couples will be made to those eligible for certain social security payments.
Confirmation of both the Townsville City Deal delivering catalytic infrastructure to drive private investment and support jobs and the upcoming South East Queensland City Deal improving the region’s global competitiveness and connectivity, and enhancing the region’s lifestyle.
For more information on the 2019-20 Federal Budget click here
In closing a good question to ask: is the delivery of a budget surplus, an unemployment rate of just five per cent, tax cuts, energy assistance payments and boosted infrastructure enough to attract Australian voters? That is the million dollar question and I suspect the answer remains a ‘no’ but the Coalition have given themselves every fighting chance for an upset.
Director – QEAS
M 0448 034 355