Budget election and possible rate cut mean months of uncertainty
1 May 2015,
Tuesday's budget is unlikely to resolve uncertainty and lift consumer confidence. By John Collett.
Little is certain for investors and households over the next several months.
Rather than resolving uncertainty and lifting consumer confidence, Tuesday's budget is likely to be the opening shot in a long election campaign. For investors, it is like trying to hit a bull's-eye with a bow and arrow while standing on shifting sands.
And most households should not expect much from this budget. "They certainly should not be expecting a lot of goodies because there is not the money for a cash slash," says Saul Eslake, an independent consulting economist.
However, not everything is the budget has been leaked or guessed. "There will be surprises on the night to ensure that there is a positive reaction," Eslake says.
To further complicate the picture, inflation data out this week showed prices fell over the first quarter of this year – usually a signal of a weak economy.
The inflation data may be enough for the Reserve Bank to cut the official cash rate when its board next meets to decide on rates on budget day. There are many influences on mortgage interest rates, but the level of the official cash rate is the largest. At 2 per cent, it's already at a record low.
A rate cut on Tuesday would have a far bigger impact on the one in three households with a mortgage than any measure contained in the budget.
However, budgets can affect consumer and business confidence. Eslake says last year's budget had a positive impact on business confidence – though the impact was small and short-lived.
Consumers were relieved because it was not a repeat of the Abbott government's first budget of 2014 that was widely perceived as unfair.
In response to the 2015 budget tax measures to spur small business purchases of laptops and coffee machines, the share prices of JB Hi-Fi and Harvey Norman lifted immediately.
It seems possible that higher earners and those on the higher rung of middle wages will get an income tax cut in this budget. Income tax cuts will be modest, such as increasing the income threshold at which 37 per cent income tax rate starts to be paid, which is currently $80,001.
And the government will likely honour its promise to end the deficit levy, a 2 percentage point tax increase imposed on earnings above $180,000.
After several months of debate over the tax concessions for negative gearing, the government has decided to leave the rules as they are.
Negative gearing is where the cost of an investment, such as property, outweighs the rent. The losses on the investment can be offset against other income, usually salary, to reduce income tax.
There is no word on whether the government plans to change any of the rebates, such as the family tax and childcare rebates. Yet these are major concerns for many families and individuals.
According to a survey of 1000 people by Galaxy Research, on behalf of Fox Symes and Associates, most said they were fearful the budget would worsen their financial position. The survey found parents are concerned about the costs of childcare and that older Australians were particularly worried about the costs of health insurance.
Superannuation is one area of personal finance certain to get attention in the budget. The salary threshold above which there is a doubling of the superannuation contribution tax to 30 per cent will likely be lowered from $300,000 to $250,000 or even $180,000.
The government is also likely to end, or limit the use of, the transition-to-retirement strategy. These rules were introduced by Peter Costello in 2007 as a way to help older workers to transition to retirement.
There is evidence the rules are being used mainly as a way for older workers continuing to work full-time to pay less tax on their income.
The government may have something to say about the low income superannuation contribution, which provides a government payment of up to $500 a year into the super accounts of low-income workers. This compensates for the fact that super is taxed at 15 per cent, which is a tax concession for most workers but is actually higher than the average marginal rates of the lowest paid.
Under Coalition policy the scheme is due to end on June 30 next year.
Economists want to see evidence in the budget of a government strategy to tackle deficits and debt.
Chris Richardson, a partner with Deloitte Access Economics, said this week that the deficit for 2016-17 will likely be $38.6 billion, $4.9 billion worse than forecast just four months ago.
And recently, ratings agency Moody's warned that Australia could lose its coveted AAA credit rating if it does not increase taxes and cut spending.
Australia is one of only a few countries with the highest AAA rating from the three major agencies – Fitch, Standard & Poor's and Moody's.
A country's or state's credit rating is like a credit rating for an individual. It is a measure of creditworthiness. The lower the rating, the higher the interest that must be paid by the government on the money it borrows.
A downgrade has the potential to increase the borrowing costs of banks, because the federal government's rating stands behind the banks' ratings.
Eslake says it is not clear-cut that a lower rating would lead to higher mortgage interest rates.
There are just so many other factors at play that can easily outweigh a credit rating downgrade.
Most economists, including Eslake and Richardson, say concerns over losing the triple-A rating are overblown.
They say losing the triple-A rating is more important in the symbolism than in the financial consequences.
But the credit rating is a good way to focus attention on the need to bring deficits and debt under control.
"It focuses attention on the fact that the government cannot give away money and return to surplus at the same time," Eslake says.