Federal budget to deliver good news

Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
(AMP Capital)

The Federal budget is creeping up on us even more quickly than usual this year.

The Government has brought forward the budget to April 2 to make way for the Federal election, which will most likely be held in May.

So it will be similar to what we saw in 2016 when the Government had a budget, then a short time later announced the Federal election.

The outlook

This budget comes as talk of doom and gloom around the Australian economy goes into overdrive, with some predicting an imminent recession.

But in the face of this negativity, we believe the budget will deliver some positive news for a number of reasons.

1. Signs of improvement

Firstly, it’s likely to show a further improvement in the underlying budgetary situation. We’ve seen the iron ore price, for example, hovering around $US80 to $US85 a tonne, well above the $US55 a tonne assumed in the budget.

Each $US10 a tonne increase in the iron ore price relative to assumptions equates to around $3 billion of extra revenue flowing into Canberra over a full year.

2. On track for surplus

With the budget running more strongly than expected in December’s mid-year budget review (so far by around $3bn per annum), that leaves us clearly on track to hit surplus next financial year. I think a return to surplus next financial year will be in the numbers as well.

3. Set for stimulus

Given the extra money flowing into Canberra there is scope for more fiscal stimulus. I think that will perhaps be the highlight of this budget.

The Government will likely announce bigger tax cuts starting in July. They’ll probably be modest in the great scheme of things, but they will provide some relief for the Australian economy and a bit of support for households.

There is also an outside chance of a ‘cheque in the mail’ direct payment to households as an election sweetener. And we might also see some spending measures.

Election impact

In terms of what will actually happen with any stimulus announced in the budget, it will depend on the outcome of the election. If the Coalition wins, then the focus in July will be on tax cuts and their passage through the Senate.

If Labor wins it’s probably going to be a mix of tax cuts with a slightly different skew, more towards low-to-middle income earners. And, of course, there’s likely to be a bit more spending coming through under Labor.

Positive news

While the budget will look healthier, the Government won’t push that too far and paint an overly rosy picture because, as the economy slows it will act as a bit of a drag on revenue in the years ahead.

But in the short term the budget will have some pretty positive news in it.

Important notes

While every care has b