The excitement and fanfare of a pre-election budget surplus fails to address some of the weaker elements of the Australian economy.
AMP Capital chief economist Shane Oliver believes the 2019-20 budget had three aims: to cement the government’s fiscal credentials by delivering the long-awaited return to budget surplus; to provide fiscal stimulus to an ailing economy; and to help get the government re-elected.
“It looks on track for the first thanks to a revenue windfall, this has provided room for fiscal stimulus and of course time will tell whether it makes a difference in the May election. Of course, while whoever wins the election will provide stimulus next financial year, its timing and precise makeup won’t really be known for some time which makes the budget a bit academic,” he said.
While the government aims to win votes by reducing income taxes, the effectiveness of these measures is highly dependent on wage growth and how confident Aussies feel with their homes falling in value.
The Morrison government is forecasting 3 per cent real GDP growth by 2021-22. AMP has it at 2.75 per cent. While the coalition is optimistic that wage growth will hit 3.5 per cent by then, AMP is betting on a far more conservative 2.5 per cent.
The budget also assumed unemployment will remain steady at 5 per cent for the next five years, while AMP sees it rising to 5.5 per cent off the back of the wealth effect from falling house prices.
“The government’s growth forecasts look a little bit on the optimistic side, particularly the assumptions for wages growth,” AMP Capital’s Shane Oliver said.
“It remains hard to see wages growth rising significantly over the next few years given unemployment is not expected to fall and on our forecasts is expected to rise to 5.5 per cent,” he said.
“Like last year’s, this is an upbeat budget. First, the near-term tax cuts for low-to-middle income earners will help households at a time of soft wages growth, falling home prices and tightening lending standards. But while roughly two times bigger than planned a year ago, this will still be relatively small though at around $20 a week.”
With a federal election around the corner, NAB chief economist Alan Oster said it will be interesting to see how Labor responds to the government’s personal tax changes.
“They have previously refused to support the 2022-23 tax changes. Labor may well keep the near-term adjustments but aim to produce bigger and nearer cuts at the bottom end (their current stance is to concentrate tax cuts below the $125,000),” Mr Oster commented.
Like AMP, NAB is slightly more pessimistic than the Treasury when it comes to Australia’s economic outlook.
Beyond the current year the bank sees the economy as tracking around 2.25 per cent – the same as the current financial year.
“Treasury however sees growth around 2.75 per cent in the out years,” Mr Oster said.
“As a result, we see higher unemployment and significantly weaker wages growth. Our profile sees the consumer still struggling with their cash-flow and, hence, with any discretionary spend.
“Also, house price falls will see construction activity fall another 20 per cent over the next two years. That said, infrastructure spending, NDIS spending in public consumption and LNG exports will support the economy.”
“The Treasury is more pessimistic on commodity prices (terms of trade falling by around 5 per cent in each of the out years) leading to lower growth in nominal GDP.
“Finally, we really struggle with any wages growth forecast above 3 per cent,” the chief economist concluded.