NAB Economic Commentary: Budget 2017-18

In their recent report, economists at National Australia Bank note that there was little discernible market reaction to the Australia's Federal Budget and add that banks suffered as news of the new tax leaked out earlier in the day while the rating agencies will clearly be looking at the underlying cash balance projections and their “sustainability” and it is equally unclear how they will see the new bank tax and what it means for growth and risk.

Key quotes:

"As expected, the centerpiece of this Budget is increased infrastructure spending, a new Housing Affordability plan, Gonski 2.0 and increased emphasis on the “Operating Fiscal Balance” (“good” versus “bad” deficits).  What was not expected was the new tax on banks liabilities – and at $6bn over the next four years it is not small. It is too early to say how banks will react."

"On infrastructure, key elements include: the second Sydney Airport, the Melbourne to Brisbane rail freight line, Snowy Mountain funding, regional growth connectedness initiatives, and extra spending on hospitals.  The package is valued at around $75bn over the next ten years.  For smaller business (up to turnover of $10m p.a.) the 20k instant write-off has been extended."

"The Housing Affordability Package includes on the supply side: release of more Government land, tax incentives for private investment in affordable housing, establishing a new Government body to provide cheaper finance for community housing, a levy of $5k per annum on vacant foreign owned housing and seniors are allowed to transfer $300kinto super from the sale of family homes to encourage downsizing.  First home owners are now allowed voluntary contributions to super ($15k per annum with a cap $30K) as a way of getting a deposit quicker. To the extent these measures are aimed at raising supply, they will clearly help – it is less obvious that boosting FHO’s ability to build a deposit will do anything other than add to house price pressures."

"Elsewhere the Government has given up on “zombie” measures of over $13bn currently stalled in the Senate.  New initiatives in this space include Gonski 2.0 (extra $18.6bn in school funding over the next decade) on a needs-based model; university fee hike of 7.5%; higher repayments on government education loans; 2.5% efficiency dividend on universities."

"The Health package includes the phased unfreezing of Medicare rebates for doctor visits and reduced costs for medicines.  NDIS is now fully funded via a Medicare levy increase of 0.5ppt to 2.5% in mid-2019. There is now going to be a one stop shop for bank complaints and registration of senior bank executives and possible deregistration together with large fines for bad behaviour."

"The government is emphasizing the Net Operating Balance – effectively the Underlying Cash Balance less net investment on the government’s balance sheet - which returns to surplus a year earlier in 2019-20. Basically we have no objection separating out the type of government debt into “business as usual” spending from “productivity enhancing investments”.  The key of course is whether the investment really is “productivity enhancing”. That said all debt has to be repaid. We (and the rating agencies) will continue to focus on the Underlying Cash Balance.  In the “Medium Term Economic Outlook” our view is that the Budget implies a further slight drag on growth near-term but a sharp drag thereafter. "

"We are much more cautious on 2018-19 forecasts and beyond.  The economy in our view will be running nearer 2½% than 3%+ by then.  And we are very sceptical about the wages forecasts – and hence nominal GDP estimates.  As such, we don’t believe the medium term fiscal projections – and hence the credibility of the fiscal profile.  This Budget will be popular but from an economic perspective “if it looks too good to be true, it probably is.”