Budget: Market implications, winners and losers

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Craig James and Savanth Sebastian at Commsec have quickly put a comprehnsive report together following last night's budget. We have pulled out some extracts below on the winners and losers, and market implications, and included the link below.

Sharemarket implications

The government has handed down a less contentious budget than those delivered over recent years. If budget measures generate less community debate and not obstructed by the Senate then confidence levels will be supported. At present, business conditions are at 9-year highs with business confidence at 7-year highs.

Increased spending on infrastructure is positive for a raft of industry sectors including building materials, transport, industrials, developers & contractors and consumer discretionary sectors.

The support for first home buyers including funding of crucial infrastructure and release of land should support builders, contractors and developers.

The staggered lift in the freeze on Medicare rebates for doctors’ visits and medical procedures should serve to support demand for medical services and boost revenues for hospital and health service providers.

The Productivity Commission inquiry into competition and concentration in banking and the levy on the big 5 banks are likely to restrain investor enthusiasm for operators in financial services sectors.

Interest rate implications

The Federal Budget has few implications for interest rate settings. The government plans to maintain discipline on growth in recurrent spending while hoping that firmer domestic and international economic growth rates flow through to stronger tax revenues. Fiscal or budget policy settings don’t provide complications for monetary policy.

The Reserve Bank could leave interest rate setting unchanged over 2017. While the Bank maintains a “neutral” monetary policy stance at present, rate hikes appear far more likely than rate cuts in 2017/18. The Reserve Bank expects inflation to hold between 1.5-2.5 per cent over the next year while economic growth is expected between 2.5-3.5 per cent over the period. The “speed limit” of the economy is currently around 2.75 per cent.

Australian dollar implications

Rating agency Moody’s has indicated that the budget measures and strategy are consistent with Australia maintaining its AAA credit rating. Apart from that, the Federal Budget has few implications for the currency. We would argue that projected path to budget surplus, still low government debt compared with other advanced nations and the sharp improvement in the balance of payments all provide solid supports for Australia’s AAA credit rating.

The more important influences on the Aussie dollar over the next year are Chinese economic growth, the tax plans of US President Trump and US monetary policy.

The Chinese economy continues to record healthy growth with consumption taking on a bigger role as a growth driver from production and exports. Building and construction are also recording solid growth rates. But as the Reserve Bank notes “high level of debt (is) continuing to present a medium-term risk.”

The US Federal Reserve is expected to tread cautiously on rate hikes. Inflation remains low despite a tighter job market. Official rates may be lifted twice more over 2017 but much will depend on the translation of wage growth to underlying prices.

CBA group currency strategists expect the Aussie dollar to continue to hover in the mid-70s against the US dollar over the next year.

Who are the losers?

The five biggest banks in Australia are being hit with a new levy on liabilities that will raise A$6.2 billion over four years. From July 1, ANZ Bank, Westpac, National Australia Bank, Commonwealth Bank and Macquarie will face a 6 basis-point levy on customer deposits above A$250,000, corporate bonds, commercial paper, certificates of deposit and Tier 2 capital instruments. A new body, the Australian Financial Complaints Authority, will be tasked with resolving disputes, and banks will face fines of as much as A$200 million for misconduct

Welfare recipients that fail to honour their job-search obligations will be at risk of losing benefits. The government will also trial drug testing for 5,000 new welfare recipients.

Students will have to shoulder a greater share of the cost of their degrees and start paying back loans at a lower income threshold.

University students will contribute an additional 7.5 per cent, to the cost of higher education - phased in over four years

Universities will pay an efficiency dividend of 2.5 per cent in 2018 and 2019, which will be absorbed by universities and not passed on to students. The higher education reform will lead to a saving of $3.8 billion through to June 2021.

Who are the winners?

Last year’s proposed tax cuts for companies were passed in part by the Senate at the end of March

Extending the $20,000 instant asset write-off for businesses with annual turnover less than $10 million for a further 12 months till 30 June 2018.

The two per cent deficit levy on higher income earners, introduced in 2014, will be removed as legislated.

The government will pump an extra $18.6 billion into schools over the next decade under a plan labelled 'Gonski 2.0'. More than 99 per cent of schools will see a year-on-year increase in funding, and, on average, per-student funding will grow 4.1 per cent a year over a decade.

First-time home buyers will receive much-needed help to get a foot on the property ladder as prices continue to surge in east coast cities. People saving to buy their first home will get a tax cut on deposit savings up to $30,000.

Incentives to encouraging older people to downsize by giving tax breaks if they funnel proceeds from selling their home into their pension funds. Other measures include releasing surplus defence land on the outskirts of Melbourne, and tax discounts for investments in affordable housing.

The cost of visiting the doctor will drop as a freeze on Medicare rebates are lifted.

Government to provide $50 million to help defence force veterans battling health conditions.

Defence spending will reach 2 percent of GDP in 2020-21, three years ahead of schedule

Government will build the second Sydney airport at Badgerys Creek

Government has also agreed to a $2.3 billion road and rail package with Western Australia covering 17 projects via a $1.6 billion injection from the Commonwealth.

Support for young parents to get jobs by expanding the successful ParentsNext programme from 13,000 vulnerable young parents to 68,000 in more than 20 new locations, especially those with high Indigenous populations

The full report is available here: (VIEW LINK)


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