Australian Commonwealth Budget 2016-17: it’s a balancing act

" Monetary policy’s ability to generate growth and inflation is more questionable than ever."
Richard Yetsenga, Chief Economist, ANZ

In short, the Government has:  

• found revenue gains to offset its spending commitments for the most part;

• committed to some policies which entail major spending after the end of the forward estimates in 2019-20; and 

• presented the budget as a comprehensive policy document by including a range of (mainly already known) non-budget policies.

The Budget deficit and debt trajectory have deteriorated slightly from the estimates in December’s Mid-Year Economic and Financial Outlook (MYEFO). Both changes in policy measures and slower-than-expected nominal GDP growth were drivers of the downgrade.

Importantly, the underlying economic forecasts appear reasonable, and in fact offer a little bit of upside relative to ANZ’s own numbers.

In a broader sense, the Budget sets the scene for the forthcoming Federal Election, which is expected to be called within the week.

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OUTLOOK STILL FRAGILE

A modest easing in the fiscal trajectory can be defended given the still-fragile growth outlook. Tighter fiscal policy further could damage fragile household confidence and hinder the economic recovery.

Confidence has been volatile in the lead-up to the Budget and given the importance of consumer spending to the recovery in the non-mining economy, the Government has likely been keen to avoid a shock to confidence of the sort seen after the 2013-14 Budget.

This is particularly the case when interest rates are at record lows and monetary policy’s ability to generate growth and inflation is more questionable than ever.

This expansionary approach is reflected in higher spending (now projected to grow at an average annual rate of 4.3 per cent over the three years to 2018-19 compared with 4.1 per cent in the MYEFO).

This will be partly offset by higher receipts, which have been boosted by higher commodity prices as well as policy changes.

As a result of the slightly larger projected budget deficits, the net debt profile has been revised higher (to peak at 19.2 per cent of GDP in 2017-18), although not enough to put Australia’s AAA credit rating at meaningful risk.

Both Moody’s and S&P have given the budget a pass mark, although the pressure to deliver a more sustainable fiscal platform remains.

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GROWTH AND JOBS

The key policy measures in the 2016-17 Budget are again framed around ‘growth and jobs’, with small (and now medium) businesses the key winners.

Middle income Australians will receive some tax relief, with an increase in the 32.5 per cent tax threshold to $A87,000 (from $A80,000 currently).

On the savings side, the most significant windfalls come from measures on superannuation, multinational tax avoidance and the tobacco excise.

For some sectors (small business on the upside and some multinationals on the downside), this budget will leave a lasting legacy. For many, including public opinion, the focus is likely to switch relatively quickly to the coming election.

Richard Yetsenga is Chief Economist, ANZ