Budget surplus to drive consumption


The Australian economy should benefit from a tax-cut fuelled fiscal stimulus post the April budget and predicted May election.

Australia’s improving budget

The Federal budget is expected to be in surplus for the first time since just prior to the global financial crisis in 2008. Economic forecasters are suggesting a surplus level of around A$15 billion.

Funded by tax bracket creep

You can see the projected budget surplus in the following chart.

Australian budget balance

Past performance is not a guide to future returns.
Source: Martin Currie Australia, ABS, Commonwealth of Australia, Factset; As of at 31 December 2018.

This growth has been funded by the very high level of taxation, in particular the strength of tax receipts through 2017 and 2018. The strength has been largely due to bracket creep.

In fact, the government’s tax take of pay packets is now 20%, well above the long-term average of 18.5%.

Tax take

Past performance is not a guide to future returns.
Source: Martin Currie Australia, ABS, Commonwealth of Australia, Factset; As at 30 September 2018

Tax take not cost of living inhibiting consumption

The Government has been very focused on trying to improve disposable income, and thus consumption that is integral to the Australian economy, by reducing cost of living expenditures such as electricity bills.

But, the biggest cost that is inhibiting consumption is in fact the increasing government tax take.

Wealth impact from housing is much less important to economy than income

The media has also been very focused on the belief that house price softness is causing economic weakness.

However, our view is that income growth via wage growth and tax cuts will be a much more significant driver of household expenditure than the relative movement in house prices.

In fact, we have found that the ‘wealth effect’ from higher house prices was not evident in the early stages of the economic cycle. People didn’t spend more when house prices went up, so we think that it’s unlikely they have spent less as they fall.

Instead, tax cuts in Australia have typically translated directly into additional consumption, and given wages are also now growing at around 2.5% p.a., the stimulus to consumption could be quite significant in FY 2019-20.

Tax relief is coming

We see that improving the weakness in consumer spending via tax relief should be the Government’s main focus for fiscal stimulus over the next 12 months.

The ongoing bracket creep issue provides a very good basis for the Government to fund tax relief for Australian taxpayers.

In the recent Mid-Year Economic and Fiscal Outlook (MYEFO), the Liberal government has made an allowance of A$9.2 billion over three years for “decisions made but not yet announced”, and this is very likely to form part of any additional tax cuts.

But irrespective of whoever is in Government post the expected May election, the Australian economy should see a strong benefit from the tax cut fuelled fiscal stimulus.

Source: Martin Currie Australia, ABS, Commonwealth of Australia, Factset; As of at 28 February 2019.

Important information

Past performance is not a guide to future returns.
The information contained in this presentation has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.

Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given.