Australia’s 2015 Budget “An Investment In Confidence”: Morgan Stanley

Australia’s 2015-16 budget is incrementally positive for the economic growth outlook, alongside the Reserve Bank of Australia’s renewed easing cycle and China’s mini-stimulus program, notes Morgan Stanley.

Daniel K Blake and team at Morgan Stanley in their May 13, 2015 research report titled: “Australia Macro+: Budget steps taken, but a leap required” note the biggest surprise from the budget was the A$5.5 billion “Jobs and Small Business Package”.

Focus towards growth and employment

The analysts point out that after the sweeping austerity and reform agenda unleashed this time last year, it appears the fiscal messaging from Australia has been almost completely refocused on growth and jobs.  However, they believe the policy measures unveiled in the 2015-16 budget were modestly stimulatory:

Australia's focus towards growth

They argue that major initiatives such as an expanded childcare subsidy should help improve workforce participation, and a 1.5% cut to small business tax and an accelerated depreciation program are also positives.

Blake et al. note the Jobs and Small Business Package has been largely targeted at tax relief and investment incentives for businesses with up to A$2 million of annual revenue. They consider the following are key elements from the budget viz.: (a) Immediate tax deductibility on every asset costing less than A$20,000 until June 30, 2017, (b) 1.5 ppt cut in the company tax rate from 30% to 28.5%, (c) Unincorporated small business will receive a 5% tax discount up to A$1,000 per annum, and (d) Other employment incentives and programs.

The MS analysts say scrapping the proposed paid-parental leave scheme in favor of a more generous and streamlined child care subsidy would help boost workforce participation.

Blake and colleagues believe Treasury’s near-term forecasts look plausible, including a US$48 /t FOB iron ore price and real GDP growth of 2.75% in 2015-16. This is against the Morgan Stanley’s forecasts of US$53/5 and 2.0% respectively. The analysts point out that after several years of significant budget deterioration, the key parameters are looking increasingly conservative, particularly in the near term. They anticipate Australia’s nominal GDP growth would be very weak.

Australia Budget and MS forecasts

Australia missed fast-tracking infrastructure spending

Turning their focus towards deficits, the Morgan Stanley analysts point out that the projected deficits were notably smaller than the analysts’ expectations, with the forecasts retaining blocked policies, including cuts to higher-education funding and family tax benefits.

Key drivers

The analysts highlight that the Australia’s latest budget missed an opportunity to start fast-tracking up to A$80 billion of infrastructure spending, which would be possible with the AAA rating. They believe such an approach could have started to make a political space for investment by segmenting ‘opex’ from ‘capex’.

The following provides a timeline of key Australian government reviews:

Key Australia government reviews

Despite considering the 2015-16 budget as an incremental positive for the growth outlook, the MS analysts believe the budget proposals are unlikely to be sufficient to lift Australia out of its sub-trend growth trajectory in the near term.