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Treasurer hands down "tax, spend, build" budget

Glenn Freeman  |  10 May 2017Text size  Decrease  Increase  |  

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Australian banks will wear a new levy on liabilities to partly fund the unwinding of spending cuts, and even increase government expenditure on infrastructure, health, and education in what is viewed as an overtly political budget.

 

Australia's financial services sector, particularly the big four banks, are among the new taxation targets of Budget 2017, with banks holding liabilities of more than $100 billion to be slugged with a new 6-basis-point levy on liabilities.

"Having exhausted every opportunity to secure savings from our 2014-15 and 2015-16 Budgets, we have decided to reset the Budget by reversing these measures at a cost of $13 billion," said Federal Treasurer Scott Morrison, in his address to Parliament last night.

"Despite this, I can confirm tonight that the Budget is projected to return to balance in 2020-21 and remain in surplus over the medium term.

"The underlying cash balance will improve from a forecast deficit of $29.4 billion in 2017-18 to a projected surplus of $7.4 billion in 2020-21."

He said that around three quarters of the increase in national debt since 2007-08 had been driven by welfare, health, and education spending.

"To respect future taxpayers, this everyday spending should be funded from the first dollar we receive in taxes, not debt," Morrison said.

"The Budget papers show, after you take into account the net operating balance, infrastructure grants, and non-cash accounting provisions, the government will no longer be borrowing to pay for our everyday expenses from 2018-19."

Changes in the healthcare and pharmaceuticals sector are also designed to help fund the spending cuts, with the establishment of a Medicare Guarantee Fund, the lifting of indexation on Medicare, and the Pharmaceutical Benefits Scheme.

Among other measures, national infrastructure spending is set to receive a $5.3-billion equity injection over the next decade.

This includes the planned Western Sydney Airport Corporation--projected to create 20,000 jobs by the early 2030s--and the expansion of the Snowy Mountains Scheme.

The government also outlined $8.4 billion for the Brisbane Inland rail project and a $472-million regional growth fund established to fund upgrades to major regional roads and highways.

Potential 5pc hit to big five profits, dividends

"I was very disappointed by this 0.06 per cent levy on bank deposit balances. If banks are unable to recoup the additional levy, it would have an approximate 4 to 5 per cent negative impact on profits, and a similar decrease on dividends," said David Ellis, Morningstar's senior equity analyst covering banks and financial services.

"However, I think the major banks will emphasise their pricing power, as they have over many years, and will partially recoup this cost…and will likely, over time, increase mortgage rates.

"It's a cumbersome and, I expect, costly levy to administer. In this day-and-age of improving productivity and business efficiency, this is really a backward step for the banks."

He emphasised the levy would only effect the big five financial institutions--Commonwealth Bank, Westpac, NAB, ANZ and Macquarie--not the regional banks or community banks, which are excluded because of the $100 billion liability minimum before the levy will apply.

"Theoretically, this is a positive for the non-major banks…if as I expect the major banks increase pricing on home loans and reduce interest rates on deposits, in theory it should lead to greater business flows to the regional banks and smaller banks," Ellis said.

Infrastructure proposals fillip

Conversely, the infrastructure measures are being hailed as a boon for companies operating in this sector, and their investors.

"The pipeline of new projects that may find their way to private investors in the future just got even bigger, and the boost they create for the economy should not be underestimated.

"Any sensible infrastructure investment, particularly in road or rail such as those announced by the Government, is going to be good for business productivity as it improves the essential ‘arteries’ of the economy, allowing business, and the economy more generally, to operate more smoothly, efficiently and productively," said Greg Goodsell, global equity strategist at 4D Infrastructure.

He sees the $5.3 billion investment in Badgerys Creek Airport as "great news for private infrastructure investors and potentially a fantastic project."

"Given the rate at which Sydney and Australia is growing there is no doubt this project is needed, and the scale of the project is enormous. By taking on the development and initial traffic risk, we believe the Government is performing exactly the role it should be in developing infrastructure projects that will be crucial to economic growth over the next 50 years.

"Ultimately, we would expect ownership of this asset to find its way to the private infrastructure market just as all the other major airports in Australia have," Goodsell said.

Likewise, he believes the inland rail project to connect Brisbane with Melbourne, Adelaide and Perth "would be truly nation building, completely reshaping towns en-route."

Productivity boost

Shane Oliver, head of investment strategy and chief economist, AMP Capital, is similarly positive on the Budget's infrastructure proposals.

"On infrastructure, the Budget has much to commend it. Infrastructure spending can help short term growth, boost long term productivity and can actually 'crowd in' private investment.

"Increased public investment is helping to offset weak private investment (see the next chart) and the infrastructure commitment in the Budget will help ensure this continues," Oliver said.

He welcomes the move to report a “net operating balance” in this year’s Budget, believing there is "much merit in focusing debt on capital spending and not recurrent spending. But debt is still debt and there is always the risk some of the infrastructure projects turn out to be white elephants resulting in 'good debt' becoming 'bad'."

On the Budget's housing affordability measures--which would enable working Australians to use the superannuation environment and voluntary contributions to grow a housing deposit, up to a maximum of $30,000 per individual--Oliver says it is "commendable to see housing affordability being a key part of this Budget."

"Certainly, the measures are to be welcomed, particularly those helping first home buyers, downsizers and measures to boost supply.

"Getting housing supply up on a sustainable basis is critical so the key is for the Federal Government to follow through with its plan to incentivise states to meet housing supply targets," Oliver said.

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Glenn Freeman is a senior editor at Morningstar.

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