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Coalition delivers 'Peter Pan' budget as China trade tensions stir

Peter Warnes  |  11 May 2018Text size  Decrease  Increase  |  
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The 2018 federal budget is modestly stimulatory. The current year deficit of $18.2bn is expected improve to $14.5bn in 2018/19 and turn positive in 2019/20, with a forecast surplus of $2.2bn. But the 2018/19 forecast is before the Coalition and Opposition punch and counterpunch their way to the next election. You can be assured further tens of billions will be promised as self-interest overtakes common sense.

Modest personal tax cuts for those earning less than $87,000 is a mild positive (but why the wait?) for households and the consumer sector with non-discretionary retailers the most obvious beneficiaries. The cuts are too small to ignite or excite. The $24.5bn infrastructure spend over the next decade adds to an already impressive state-dominated pipeline which will benefit cement, concrete, and aggregate suppliers, namely Adelaide Brighton and Boral.

Treasurer Scott Morrison donned a Peter Pan outfit (not a pretty sight) when promising tax cuts to those earning over $180,000, with his Neverland promise of relief in 2024. The promise assures these so-called high earners will age more quickly. Bill (Captain Hook) Shorten and the Greens are ready to rain on Peter Pan's parade.

GDP growth forecasts for 2017/18 are above consensus and benefits from bracket creep, which boosted current year revenues, are expected to continue to be a meaningful contributor to revenue over the next five years. Gross debt is forecast to peak in 2018/19 at an eye-watering $579bn comprising a combination of Morrison's good and bad debt, but unfortunately mostly bad. Modest reductions are forecast to start in 2019/20. It's a long way to Tipperary.

The improved terms of trade over the past year, increased corporate and personal taxes from higher profits and the additional 400,000 jobs created in 2017 and a meaningful boost from bracket creep, lifted government 2017/18 revenues. But the benefits of increased resources exports, both in terms of volume and price, can be fleeting and is out of the control of management and government. This lack of sustainability and volatility are why most resource and energy companies under Morningstar coverage are not assigned an economic moat and their uncertainty ratings are high.

So, the government should be careful when extrapolating the benefits of our resource exports and locking in longer-term expenditure based on their continuity. The possibility of an escalation in trade tensions between the US and China, which could affect China's demand for resources and therefore prices, should not be ignored.

The soft retail sales data for March, where sales were flat on February's print, are a reminder the household sector is still straining from expense growth at rates well above inflation and wages growth stubbornly below both trend and inflation. These pressures are unlikely to change in the near-term keeping an inactive Reserve Bank on the fence until 2019. The scrapping of the 2% increase in the Medicare levy helped household disposable income from further erosion.

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Self-Managed Super Funds dodged further bullets but are still reeling from the Coalition's $1.6 million cap assault and Labor's attack on surplus franking credits. Surely in the long-term government should be working toward a goal of minimising the necessity of reliance on pensions. Policies should encourage superannuation contributions and the sooner individuals start, the sooner the compounding effect on investments can get to work.

In the wake of the budget, it was interesting to see what Liberal Democrat David Leyonhjelm and Greens Leader Richard De Natale proposed. Leyonhjelm suggested slashing the public service, cutting government spending, and ending Australia's culture of entitlement. De Natale proposed a 40% mining tax as well as changes to the Petroleum Resource Rent Tax, the phasing out of the capital gains tax discount by 10% per year over five years and increased personal tax rates for high income earners--"those who earn more should pay more". And the winner is?

Trade negotiations and views of the Chinese elite

So far US/China trade negotiations have been unproductive. Initial US demands were so extreme it was a surprise the Chinese even turned up and any agreement was unlikely. Positively both parties agreed to come back to the table. But unless the Trump administration backs down, little will be achieved with tensions lingering. Both parties seem willing to compromise but the chances of a near-term solution seem remote.

Wht grad

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

 


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is Morningstar's head of equities research.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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