The 2015/16 budget feels so fundamentally different to its 2014/15 sibling that MP’s and commentators have begun wondering if it’s actually an election budget.
Some see little room for improvement in the forecasts underpinning the budget. That implies that as a result of the high level of uncertainty around global financial markets, the iron ore price, the Senate and recently subdued consumer and business confidence, that the government can only miss to the downside.
The reality is that in delivering this budget Treasury has not wandered far from market consensus and, in focusing on kick-starting small business investment and spending, where most employees work, the government has a real shot at both speeding up the economic transition and turbo-charging domestic growth.
That’s because in a behavioural sense if employees – who are after all the nation’s consumers – are in a more positive work environment, they will themselves be more positive and in time spend more, save a little less, and worry less about job security. All of which should help lift domestic economic activity.
CBA chief economist Michael Blythe has gone through the budget assumptions and key economic forecasts as a credibility check and it seems clear that any material differences are at the margin.
What you see here is only minor quibbling but the one that stands out as a potential key kicker for next year’s budget is the terms of trade. Blythe says that in particular the iron ore forecast in the budget of $48 a tonne “appear a tad pessimistic given the spot price is currently USD63 (12th May). Upside risks to forecast.”
Indeed CBA’s commodity analysts have a target of $64 a tonne by the end of 2016, Blythe says.
Think of that $300 million in tax revenue per $1 lift in the iron ore price: the government could be looking at an extra $10 billion in receipts over the forward estimates, if the CBA forecast is correct.
Blythe also compared the RBA and Treasury views of the world and it’s clear that while they are not in lock step they are not in material disagreement either.
So far so good. The budget has a clear chance of doing what Peter Costello did for so many years, and over-delivering.
But, Blythe highlights some risks noting that the “projections reflect an optimistic assumption about revenue growth”. That’s because “implied revenue elasticities (i.e what sort of rise in revenue do you get from a given increase in nominal GDP) have surged in 2014/15 are at the high end of the range of the past 50 years over the forward estimates period.”
This, he says, poses risks to the “downside” for revenue.
It’s not the only risk the government faces. China’s growth could come in weaker than expected, US growth could falter and the Fed might hold off raising rates leaving the Aussie higher than forecast and a handbrake on growth. Or the iron ore price could fall again.
This budget is a balancing act. Treasurer Hockey has given and taken in order to get the deficit print of $35.1 billion for the underlying cash deficit in the 2015/16 year. But, if the targeted measures are as successful in turning around domestic confidence and consumption as they can be, and if iron ore rises just a little, Treasurer Hockey might just keep on smiling.