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4 May 2016
AUD: Budget tiptoeing into an election and around rating agencies – Goldman Sachs
Research Team at Goldman Sachs, suggests that the 2016-17 Australian Commonwealth Budget is calibrated with an election in mind, yet it is a Budget with competing aims.
Key Quotes
“It is a Budget positioning to build stronger growth and employment, yet it is a Budget that seeks to do minimal repair to the nation’s finances and imparts a negative fiscal impulse on 0.5% pa on nominal economic growth on average over the next 4 years. It is a Budget that continues to suffer from the headwinds of weaker growth at home and abroad, yet does not seek to alter the same fiscal strategy attempted by successive governments. It is a Budget that once was held out as providing comprehensive taxation reform, yet has reverted to simplistic hikes in tobacco taxes, a minor lift in a personal income tax threshold and changes to superannuation for high income earners to fund taxation cuts for small business.
This may not sound like an election Budget, but it is Budget that is tightly calibrated to avoid a downgrade in Australia’s AAA credit rating. On the numbers presented in this Budget it may well avoid a warning from rating agencies being issued in the near term; however, on our projections for commodity prices, this will prove more difficult. Should the looming double dissolution election see the Government returned in the House of Representatives but not deliver a more workable Senate then an immediate $14.5bn of damage to the Budget over 4 years would have to be recognised, making a downgrade in the credit rating more likely.
How will the public react to the Budget? We suspect on balance voters will be largely indifferent. There are few headlines that will be written on large Budget blowouts and ‘black holes’ or alarm from large portions of the community that can reasonably decry the Budget as unfair, essentially because the Budget seeks to do so little. Apart from concern that confidence in the superannuation system has been undermined, there are few near-term implications for financial markets. The pertinent implication is the proposed change in company taxation rate will increase the present value of a firm’s future after-tax cash flows by ~3.7%.”
Key Quotes
“It is a Budget positioning to build stronger growth and employment, yet it is a Budget that seeks to do minimal repair to the nation’s finances and imparts a negative fiscal impulse on 0.5% pa on nominal economic growth on average over the next 4 years. It is a Budget that continues to suffer from the headwinds of weaker growth at home and abroad, yet does not seek to alter the same fiscal strategy attempted by successive governments. It is a Budget that once was held out as providing comprehensive taxation reform, yet has reverted to simplistic hikes in tobacco taxes, a minor lift in a personal income tax threshold and changes to superannuation for high income earners to fund taxation cuts for small business.
This may not sound like an election Budget, but it is Budget that is tightly calibrated to avoid a downgrade in Australia’s AAA credit rating. On the numbers presented in this Budget it may well avoid a warning from rating agencies being issued in the near term; however, on our projections for commodity prices, this will prove more difficult. Should the looming double dissolution election see the Government returned in the House of Representatives but not deliver a more workable Senate then an immediate $14.5bn of damage to the Budget over 4 years would have to be recognised, making a downgrade in the credit rating more likely.
How will the public react to the Budget? We suspect on balance voters will be largely indifferent. There are few headlines that will be written on large Budget blowouts and ‘black holes’ or alarm from large portions of the community that can reasonably decry the Budget as unfair, essentially because the Budget seeks to do so little. Apart from concern that confidence in the superannuation system has been undermined, there are few near-term implications for financial markets. The pertinent implication is the proposed change in company taxation rate will increase the present value of a firm’s future after-tax cash flows by ~3.7%.”