Australian Commonwealth Budget 2017-18: Little carrots, big sticks and plenty of steel - ANZ

Analysts at ANZ suggests that the Australian commonwealth budget 2017-18 is an ambitious budget that looks to change the game on infrastructure, deliver some measures around fairness while still looking to achieve a reasonably credible path back to surplus.

Key Quotes

“It is not without risk, not least in its reliance on increased revenue to close the gap with spending and the continued growth in gross debt outstanding.”

“The Government has found money for infrastructure, removed AUD13bn of “zombie” policy measures and tinkered with housing affordability and still returned to an underlying cash surplus by 2020-21. It has achieved this essentially by a combination of a AUD6.3bn “major bank levy”, a AUD8.2bn lift in the Medicare levy (extra 0.5 percentage points from July 2019), by taking on more debt and by relying on a return to trend economic growth.”

“The projected return to an underlying cash surplus by 2020-21 disguises where much of the fiscal action is – on the capital side. Capital spending will be lifted to a new record of AUD50.6bn in 2017-18 when direct capital investment, capital grants and financial asset investments are summed. There will be further significant capital spending in future years. Indeed, the size of the jump in infrastructure spending is such that questions remain around how quickly these projects can reach the actual construction stage, and whether they will run into capacity constraints. Given the lag time between project identification and construction, it is likely that these larger projects will ensure that infrastructure investment remains elevated into the 2020s.”

“While the Government has justified the capital spending by emphasising the difference between “good” and “bad” debt, one of the weaknesses of its fiscal strategy is that the gross level of debt continues to grow over the projections even after the underlying cash and operating balances return to surplus. The Government now projects the face value of debt to rise to more than AUD700bn in 2026-27, up more than AUD60bn compared to the projection in December’s MYEFO. This is not without cost, not least because additional debt adds to leverage and makes the Government more vulnerable, lowering its defence against shocks.”

“The Government has revised its real GDP outlook slightly lower for 2016-17, largely reflecting weather events including Cyclone Debbie. But nominal GDP has been raised modestly higher in 2016-17 and 2017-18 with forecasts for 6% and 4% respectively. Projections for 4.5% nominal GDP growth in 2019-20 and 4.75% growth in 2020-21 are reasonable, in our view, albeit dependent on a relatively positive economic story playing out.”

“The small surplus in the underlying cash rate depends heavily on the return to stronger economic growth and new revenue raising measures. Receipts are projected to rise to 25.4% of GDP by 2020-21 from 23.2% of GDP in 2016-17. This would be the highest since prior to the GFC when commodity prices were moving sharply higher. Payments on the other hand are expected to stay broadly stable at 25% of GDP in 2020-21 from 25.1% in 2016-17. There are downside risks to the revenue numbers, in our view, while on the spending side tight discipline will be required.”

“The maintenance of a surplus projection by 2020-21 and the dropped zombie measures should please credit rating agencies and we don’t see this budget pushing any of the agencies to bring the rating lower, though the additional leverage may attract some adverse comment. Importantly, Australia’s external position has also improved, offsetting some of the fiscal slippage. In response to the Budget Moody’s has commented that “we assess Australia’s fiscal strength as very high”.”