The personal income tax cuts for middle- and low-income earners are likely to begin from July 1 2018, partly to offset individuals moving into higher tax brackets. The government will no longer need to offset the previously planned increase in the Medicare levy, as previously announced.
The government will retain its plan to gradually cut the company tax rate from 30 per cent to 25 per cent for businesses with a turnover of more than $A50 million by 2016-27, despite not (yet) having Senate support.
It is conceivable – although not ANZ Research’s expectation – the government could remove these measures from the budget and use the funds elsewhere.
ANZ Research expects, therefore, the Government will introduce personal income tax cuts worth around $A3 billion in 2018-19, rising to around $A5 billion in 2019-20 and around $A8 billion in 2020-21.
In other words, the Government will use the better-than-expected receipts in the current and next financial year to fund income tax cuts for the household sector.
It is likely the Government will want lower taxes to be felt by households ahead of the next election, with greater tax cuts anticipated if they vote the incumbant back into office.
Net debt is likely to be higher, with the government indicating funds will be allocated for several large infrastructure projects. These include $A5 billion for a Melbourne airport-to-CBD rail link and the $A1 billion for the M1 in Queensland. The Commonwealth also needs to fund its purchase of the Victorian and NSW shares of Snowy Hydro in this budget.
ANZ Research hopes ambitions for budget stability in the medium term projections is maintained as Australia’s fiscal position, albeit healthy by international standards, is still weaker than before the global financial crisis.
It is not until 2020-21 payments as a share of GDP are expected to come down to the last 40 year’s average (24.9 per cent). Net debt is expected to equal 18.9 per cent of GDP in the current year, and (on MYEFO assumptions) peak next financial year.
That means National Disability Insurance Scheme spending, ageing, structural changes, technological trends and community expectations of government policy need to be managed tightly.
The Australian Commonwealth Government Bond (ACGB) market has held a degree of indifference to the rise in government debt over the last few years. This is mostly because any supply has been readily soaked up by demand generated by regulatory measures and the flow of capital brought about by the global quantitative easing programs.
As the global rate structure starts to lift with gradual monetary tightening around the world, Australia’s former ‘high-yield moniker’ no longer rings true. This will become more of a headwind.
However, with both net and gross debt issuance dropping over the forward estimates, ANZ Research has little concern for demand-side pressures. Indeed, Australian yields are attractive on a hedged basis and ANZ Research expects yields to continue to contract against markets such as the US.
ANZ Research expects the longer end of the curve to be the beneficiary of reduced ACGB issuance as supply falls.
Markets will keep an eye on revenue assumptions, potential tax cuts and commodity prices as well as any changes ahead of the election due in early 2019. These factors will also be noted by credit rating agencies, though do not expect any movement on Australia’s rating.
With the government politically motivated to maintain its rating – while also needing to protect Australia’s ability to raise foreign capital – there is little room in the budget projections for deterioration in estimates.
Fiscal policy will become slightly looser over the coming two years, compared to where it would have been if there were no policy changes. For the Reserve Bank of Australia, this modest change, while welcome, is unlikely to substantively change the outlook.
Cherelle Murphy is a Senior Economist at ANZ