To cut through the deafening noise around this week’s Federal budget, Livewire has asked four of Australia’s leading Economists to boil the budget down to its single most important theme, and to explain what it means for investors. We also asked which specific sectors of the market are going to be the winners and the losers. While the bank levy has the bank shares under pressure, there will also be some powerful long-term investment themes from this budget. Click below for responses from Craig James, Chief Economist at Commsec; Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital; Stephen Koukoulas, Managing Director at Market Economics; and David Bassanese, Chief Economist at Betashares.
Key themes and implications
Shane Oliver reported to us that the single most important theme in the budget was the focus on housing affordability. It was far more comprehensive than he had thought it would be and the idea of setting supply targets with states and reqarding them when they meet those targets has a real chance of fixing the problem on a 5-10 year horizon. The measures around first home buyers, downsizers and lower cost affordable housing also make sense when taken together as a package. The main implications are as follows:
- No major changes to super arrangements (beyond those relating to FHBs and downsizers).
- Some minor adjustments to negative gearing deductions.
- A slight boost to confidence and spending from the budget but not enough to affect the RBA’s thinking on rates. In fact the heavy lifting on the economy will still have to be undertaken by the RBA if growth disappoints.
- Risks remain around the projected return to surplus and this could one day way on the $A.
Stephen Koukalas told us the single most important theme to emerge from the 2017 Federal budget was that the path to surplus remains a long and arduous one. With the hike in the Medicare levy and bank tax, there was a realisation that the revenue side of the budget ledger needed to be addressed if there was any hope of a balanced budget. That said, it is clear that budgets are based on high spending, high taxing which reflects the demand of the electorate to have the public sector provide a high base level of funding for health, education, age care, infrastructure and disability assistance. This is unlikely to change over the long run, which means further tax hikes are more likely than not in subsequent budgets.
In terms of what this means to investors, Stephen told us that the immediate market reaction said it all – aggregate markets were unmoved and the focus will remain on the growth momentum, global issues and policy pressures from central banks.
It is worth noting that gross government debt will continue to rise out to at least 2026-27 where is reaches $725 billion from current levels of $490 billion. There means the government bond market will remain liquid, and the AOFM is likely to continue to have a bias to issuance of longer dated (over 10 years) bonds to move the Australian bond market move into line with other countries.
On this question of the key theme in the budget, David Bassanese’s view is that it is the overdue recognition of tax increases as a legitimate means of addressing the budget deficit, especially given an apparent unwillingness to cut more deeply into spending programs. The slash and burn approach of the 2014 budget has been dead and buried, if only because the left-leaning make-up of the Senate suggests unfairly targeted spending cuts are unlikely to pass in any event (unlike in the USA!). The willingness to countenance big tax increases is a surprise, but is reflective of the groundswell of political populism across Western Democracies in light of rising income inequality.
David told us that unfortunately the implication of this is that greater efficiency in public sector spending seems too hard in the present climate, which is not great for economic productivity. Tax rates - at least for households generally - are unlikely to fall by much given the desire to maintain current levels of government spending. As banks have now found the hard way, it may end up that business ultimately pays for its proposed income tax cuts through a range of other taxes and/or less generous deductions.
Craig James reported that the while the Treasurer would say the central theme was all about making the right choices, he thought the key theme was pragmatism. The community wanted a lot, such as building more infrastructure, improving housing affordability, funding the disability insurance scheme and reducing the budget deficit. And the government has realised that a more pragmatic approach was required so it could get the agreement to address all issues. And that if the Government is more successful in getting measures through the Senate then the implications of this is less investor angst. It also means the Government can get on with governing. But it is also clear that there are no sacred cows. The Government will look to unconventional measures like the bank levy to meet its commitments.
Winners and losers
In terms of which market sectors are the winners and losers from the budget, the vote was unanimous that the banks are the losers.
Stephen Koukoulas went on however to say that the levy is unlikely to have a material impact on banks profits or dividends, as the banks are close to certain to pass on the cost to its customers via higher lending rates lower deposit rates. When there have been other tax changes, notably the GST and the carbon tax, firms passed these costs on to customers. It would be reasonable, Stephen said, to expect the same with the bank levy.
He also told us that the reals losers seem to be householders – the hike in the Medicare levy will trim disposable incomes, which at a time of subdued wages growth, presents a downside risk to the forecast for household consumption spending.
On who the winners are going to be, Craig James said that increased infrastructure spending will assist building materials, engineering, developers and contractors.
Further to this, measures to improve housing supply will assist some developers. But for the developers this is balanced by restrictions on selling homes to foreign investors. The Health sector benefits from increased spending in the sector and the lifting of the freeze on Medicare rebates.
Shane Oliver also expects the winners would be construction and building material companies that will benefit from the infrastructure and housing packages.
David Bassanese also suggested that the infrastructure plans should also provide a boom to regional Australia.