Economics & Markets

The 2019-20 Australian Federal budget

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Australian federal budget overview

This is a reasonably good budget, but it doesn’t excite like you might expect from a pre-election budget. I think that the government had three objectives:

  • To provide some stimulus to the economy at a time when it needs it; 
  • To keep the budget moving toward surplus, and in fact get it back into surplus; and
  • To help the government get re-elected.

When you run through those things, they have provided some stimulus but not a lot, it will probably help the economy but not dramatically so, for example, it probably won’t be enough to help head off future interest rates cuts from the Reserve Bank of Australia.

But against that, we are moving back to a budget surplus after 11 years in deficit so that’s good news.

Whether it’s enough to get the government over the line at the upcoming election remains to be seen – I don’t think it’s an overly exciting budget and therefore the government will have more work to do to shore up its position going into the upcoming election.

What are the key measures?

The main measures in the budget are expanded tax cuts for low-and-middle income earners, they were expected to average around $10 a week but now its going to be around $21 per week so pretty good news on that front.

On top of that there’ll be one-off payments to pensioners and other eligible welfare recipients ranging from $75 for a single to $125 for a couple.

It’s also going to be a little easier for 65-67-year-olds to put money into their superannuation; to top it up.

Things are also looking a little bit more positive for small business with an expansion in the instant asset write-off and the promise of greater tax cuts to come next decade.

And finally, and I guess this is the big one after 11 years in the red – we are moving back into a budget surplus which has to be said is good news.

Who are the big winners?

The winners from this budget are low-and middle wage earners, eligible welfare recipients who will get those one-off payments, small businesses, and of course superannuation members, particularly those aged around 65-66, who can top up their superannuation going into retirement.

How will investment markets respond to the budget?

The key thing that markets look at is whether there’s much stimulus in the budget and they also look at whether it looks fiscally sound. In terms of being fiscally sound, yes it does, we are heading back towards a surplus, so our AAA rating is probably assured as a result of this budget.

That said it doesn’t provide a lot of stimulus so that’s why, when the budget was released the Aussie dollar didn’t move much. If there was a huge fiscal stimulus the market would write off the prospect of future interest rate cuts and the Australian dollar would go up. But we didn’t see that. There was some fiscal stimulus, but it wasn’t overwhelming therefore there was hardly any impact on the Australian dollar, very little impact on interest rate markets, on bond markets.

In terms of the share market there are some positives in there for companies involved in infrastructure spending – there’s a bit more on infrastructure in the budget so construction companies will benefit, and those tax cuts will provide some help to consumer goods companies but overall, it’s hard to see a big boost to the Australian share market or financial markets more broadly from this budget.

What does it mean for house prices? Very, very little. There’s little in there that‘s going to affect house prices around Australia, we still see the trend being on the downside in Sydney and Melbourne other cities not so bad.

What was announced in terms of infrastructure?

In the last five or six years in Australia we’ve seen a big focus on infrastructure, and this is the right thing because for many, many years Australia – and many western countries – have underinvested in infrastructure. That has led to a whole bunch of things, it’s led to slower economic growth, congestion and people getting upset with infrastructure not keeping pace with population growth.

The Federal government has upped its spending on infrastructure for the next ten years from roughly around $75 billion to around $100 billion so that’s a good thing. It will help expand the economy because when you spend more on infrastructure you actually crowd in private businesses to infrastructure assets.

Obviously it’s not going to have a huge impact over the course of the next year but over the course of the next decade we’re going to see that continued infrastructure spend occurring in Australia which is good news from a very long term perspective in terms of efficiency through the economy.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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