Federal Budget 2019: what it means for the market

Market insights

Tuesday 02 April 2019

Federal Budget Review – A promise made is a debt unpaid

We review the Australian Federal government’s 2019/20 budget and assess its implications for the Australian financial markets. The table below highlights the key budget forecasts and changes since the December 2018 Mid-Year Economic and Fiscal Outlook (MYEFO).

Key highlights:

  • The 2019/20 budget was positive with the government increasing spending significantly on the back of better than expected revenues and without an increase in taxes.
  • As a pre-election budget, it was sensible yet also aggressive with fiscal top-ups, numerous easy giveaways and with a knockout punch coming from multi-year tax cuts. Unfortunately, the staged implementation of these tax cuts suggests that rounds two and three may never see the light of day if the Coalition fails to hold onto government.
  • Budget repair was a highlight with the underlying cash balance expected to return to surplus in 2019/20 for the first time since 2007/08. This should be welcomed by the ratings agencies as well as those voters who applaud solid economic management.
  • ‘Winners’: low/middle income consumers (tax relief, cash handouts), infrastructure / construction (road/rail), small/medium businesses and marginal seats (local projects).
  • ‘Losers’: There were few losers but we highlight the financial sector (increased funding for regulators), larger companies (no tax cuts), potential tax avoiders and welfare recipients (no handouts).
  • The overall positive tone of this budget and ongoing government expenditure, without increasing taxes, places this budget in the ‘as good as it gets’ camp and should be welcomed by investors.
  • While a potential change of government and Labor’s announcement of a September budget muddies the waters somewhat, the opposition’s tax policies on franking credits and capital gains tax leave it well placed to match tax relief measures, particularly in the absence of wage growth.

 

Budget forecast changes

MYEFO forecasts 2019/20Budget forecasts 2019/20Direction change
Underlying cash balance ($b) $4.1 $7.1
Underlying cash balance (% GDP) 0.2% 0.4%
Net debt (% GDP) 17.1% 17.6%
Real GDP 3% 2.75%
Household consumption 3% 2.75%
Business investment 5% 5%
Public demand 3% 3.25%
Private demand 2.75% 2.25%
Dwelling investment -4% -7%
Unemployment 5% 5%
CPI 2.25% 2.25%
Wages 3% 2.75%
Major trading partners growth 4% 4%
AUDUSD $0.73 $0.71
TWI 63 61
Iron ore (US$/t) $55 $55
Metallurgical coal (US$/t) $120 $150
Thermal coal (US$/t) $93 $91

Source: Treasury, MWM Research, April 2019

 

Budget winners and losers:

Winners
Low/middle income earners - low and middle income tax offset doubles to max of $1,080. Energy assistance payment of up to $125 for pensioners, veterans and single parents.
Roads & rail - Funding for ROSI, Office of Road Safety, Black Spot program and Regional freight corridors.
Marginal seats - focus on local infra (road, rail, fixing black spots and congestion) and services within marginal seats following success of Victorian election.
SMEs - Increasing the instant asset write-off from $25k to $30k and expanding to include medium size businesses with annual turnover of $10-50 million pa.
Healthcare - increased funding for aged care, mental health, anti-drugs strategy, PBS items and indexation for GP and diagnostic imaging services.

Source: Budget.gov.au, MWM Research, April 2019

Losers
Banks - $606m funding increase for regulators and related actions to respond to the Royal Commission. Bank levy was positively not increased but is a risk under change of government.
High income earners – tax relief is very long-dated with bracket creep to continue biting into household income.
Welfare - no increase to Newstart, also excluded from energy bill payments.
Housing - no announcements that would slow the decline in house prices.

Source: Budget.gov.au, MWM Research, April 2019

As expected, this year’s budget contains mostly voter-friendly measures ahead of the May Federal election. The government finds itself in a fortunate position with revenues supported by buoyant commodity prices and supporting new spending measures rather than new taxes. Iron ore rallying to ~US$85/t was well ahead of the US$55/t MYEFO forecast. In contrast to the last few years, Australia’s AAA credit rating looks safe with the budget in a healthy position and following S&P’s upgrade to a stable outlook in September.

The government’s focus on infrastructure is a familiar theme, but this budget brought a greater focus on safety and local issues. We think the success of the Victorian Labor Party’s election strategy, which promised the removal of level crossings to combat accidents and congestion, influenced the thinking here. There were numerous smaller commitments to fix known problem areas (intersections, roundabouts, blackspots, bridges, road sealing etc) in key electorates.

 

Resources to the rescue

Source: Treasury, MWM Research, April 2019

Tax cuts are almost a certainty for pre-election budgets and this budget did not disappoint with low income earners the big winners. The Energy Assistance Payment (EAP), a cash handout of up to $125 to help pay energy bills, will be paid to eligible recipients before July.

Step one of the government’s Personal Income Tax Plan, which seeks to “provide immediate tax relief for low and middle income earners” has also received a significant boost. The low and middle income tax offset of up to $530 will be doubled to $1,080 and paid via tax returns. Tax payers on up to $90k will receive the maximum benefit with dual-income families on average incomes potentially eligible for a $2,160 tax reduction.

These are both short-term measures with the energy payments and tax relief potentially available in the next few months. We can’t imagine much political opposition to low-income tax relief so expect these measures will be passed.

Consumer sentiment has trended lower in recent months so tax cuts should at least provide some improvement to sentiment. Pre-election budgets typically result in an uptick to consumer confidence and, given we are coming off a low base we would expect to see some improvement. Ultimately, we expect this money will be spent rather than saved and should provide a degree of support to sentiment and the slowing domestic economy.

Treasury has taken the knife to its economic forecasts since the December MYEFO forecasts in recognition of the recent slowdown. While last year’s estimates looked optimistic this year’s look numbers are more realistic with forecasts for GDP, private demand, dwelling investment and wage growth all revised lower. Interestingly treasury assumes the iron ore price will fall from US$85/t currently to US$55/t over the next 12 months. If iron ore prices were to remain elevated this would boost 2019-20 tax receipts by $2b.

 

Equity market implications

This was a budget with few historical precedents, delivered less than two months out from the Federal election. Net-net we view the budget as a short term positive for sentiment and for equities.

The major positives were tax cuts / cash handouts for consumers, ongoing infrastructure spend and the better than expected budget repair. There were no big new taxes required to pay for the major policies given the revenue uplift.

We highlight the major sector impacts below:

Retail:

Our retail analysts expect the boost to consumers will most likely be spent on clothing, footwear, homewares, recreational goods and department stores. This suggests support for Myer, Kmart, Big W, Target and potentially Bunnings and JB Hi-Fi. The size of this stimulus is modest compared to prior efforts, such as the $900 handouts of 2009, but will nonetheless provide support in a difficult operating environment for retailers.

Electronics are not expected to see an outsized surge in spending, but valuation multiples for Harvey Norman (HVN) and JB Hi-Fi (JBH) are expected to increase on any consumer stimulus. This has already begun to play out in recent weeks (see chart) as policies were announced. See ‘Listed Consumer Sector – Show me the money’, 20 March 2019, for a full rundown.

 

A much-needed shot in the arm for retailers

Source: FactSet, MWM Research, April 2019

In addition to the direct spending beneficiaries, is it possible that when consumers actually do receive additional funds in banks accounts that it has some positive spill-over effects on areas such as credit demand (positive for banks), bigger ticket items such as cars (sales and leasing) and peripheral services to housing.

Infrastructure:

The other clear winner from the budget is the infrastructure sector with the government intending to invest $100b over the next decade, up materially from $75b at the last budget. Regional areas were the winners with a focus on roads and rail. Key projects announced included:

  • $3b boost to the urban congestion fund
  • $2.2b road safety including $550m boost to black spot program, $275m for bridge renewals and $275m for heavy vehicle safety
  • $2b for Melbourne-Geelong fast rail project
  • $1.5b for Adelaide North-South corridor
  • $1.1b to upgrade Melbourne roads
  • Various state-based road/rail project funding with largest for NSW ($6.1b), VIC ($2.8b) and QLD ($2.6b)

As such the infrastructure sector will continue to be largely underwritten by government spending. We view the domestic infrastructure exposed names as the key beneficiaries, namely Adelaide Brighton (ABC) and Boral (BLD) for building materials exposure and CIMIC (CIM) which continues to win regional rail & road tenders.

 

Public infrastructure engineering work

Source: ABS, MWM Research, April 2019

RBA rate cuts this year remains our base case. While fiscal stimulus (tax cuts, cash handouts) is welcome, it’s unlikely enough to sustainably prop up inflation or arrest the decline in house prices. Indeed, the RBA changed their language at its April board meeting to “monitor developments and set monetary policy to support sustainable growth”.

Investors will now turn their attention to the election. It remains to be seen whether this budget will be enough to sway voters, but given the number of tax cuts and local projects announced it should at least make it a closer race. We view the election as the main game with changes to franking credits, negative gearing and capital gains tax the most relevant for investors.

Share this

If you enjoyed reading this article, why not share it?

Simply copy and paste the text and include a link to the article. Please read the Expertise Articles Terms of Use before sharing.

Related articles


 

Subscribe to our monthly newsletter

We bring you technical updates, financial insights and industry expertise.

Newsletter shown on desktop, ipad and mobile
Thank you for subscribing.
There seems to be an error with your request, please contact us.

Simply fill out your details below:

The information you provide on this form will be retained and handled by Macquarie in accordance with our Privacy Policy and we may contact you about products or services we feel may be of interest to you. If you do not wish to provide all details or receive information of this nature, please phone us on 13 62 96.

Find out how we can help


If you'd like to speak to a specialist about how we can help build your business, get in touch.

The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Limited ABN 94 122 169 279 AFSL 318062 ("MGL") and its related entities (the "Macquarie Group", “We” or “Us”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. No part of the compensation of the analyst is directly or indirectly related to the inclusion of specific recommendations or views in this research.

This research has been issued and is distributed in Australia by Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504. It does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider if it is appropriate for you. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. It has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person.

Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. We accept no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research.

We have established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements, which sets out how we must seek to identify and manage all material conflicts of interest. Our officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. We may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. Our employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research.

Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

© Macquarie Group.

Any information on this page in relation to mortgages has been prepared by Macquarie Securitisation Limited (MSL) Australian Credit Licence (ACL) 237863 ACN 003 297 336.

Unless stated otherwise, this information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502.

This information is provided for the use of licensed and accredited brokers and financial advisers only. In no circumstances is it to be used by a potential client for the purposes of making a decision about a financial product or class of products.

Except for Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (MBL), any Macquarie entity referred to on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cth). That entity’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.

Important Information

Restricted to financial services professionals

This information on this website is provided for the use of financial services professionals only. In no circumstances is it to be used by a potential investor for the purposes of making a decision about a financial product or class of products.

In order to proceed, please confirm that you are a financial services professional by clicking 'I accept'.