A Federal Budget surplus and tax cuts at the core of Treasurer Josh Frydenberg’s pitch

THE Federal Budget aims to deliver the dual outcomes of a return to surplus after more than a decade of deficits, while also delivering vote-winning tax cuts for households, AICD chief economist Mark Thirlwell says.

• AICD chief economist Mark Thirlwell’s updates

THE Federal Budget aims to deliver the dual outcomes of a return to surplus after more than a decade of deficits, while also delivering vote-winning tax cuts for households, AICD chief economist Mark Thirlwell says.

While all Budgets are political in nature, the timing of this one before a looming federal election means the coalition government is explicitly looking for a bump in support from the measures, Mr Thirlwell says.

Households have been “squeezed by an uncomfortable combination of falling house prices and sluggish income growth’’, and the Budget serves to provide some breathing space.

Mr Thirlwell said the Government had benefited from strong outcomes for commodity prices and strong employment growth, as well as low inflation.

“Taken together, this has delivered some useful fiscal room for manoeuvre on both the spending and revenue sides of the budget equation,’’ he said.

“Just as the previous budget benefited from the nice surprise of tax revenues running comfortably ahead of Treasury projections, so has the current budget enjoyed a similar windfall.’’

But the positive messaging from Treasurer Josh Frydenberg needs to be taken in the context of less positive underlying numbers.

“In stark contrast to the positive nominal economic story that has supported the budget bottom line, the real economy looks relatively weak,’’ Mr Thirlwell said.

“That’s despite the budget papers’ description of an economy ‘in fundamentally good shape’. Real GDP growth for 2018 as a whole may have come in at a fairly respectable 2.8 per cent, but last year was very much a story of two halves.

“And while the first half saw annualised growth roaring along at close to four per cent, the second saw that plummet to less than one per cent.

“Moreover, in per capita terms, GDP growth contracted for the final two quarters of 2018 (hence headlines earlier this year proclaiming a ‘per capita recession’).

The Budget did not include much new on the corporate governance front, however the ramifications from the Financial Services Royal Commission were being worked through.

“The Budget saw few new governance policy measures, with the most significant package being a total of $606.7m over five years to facilitate the Government’s response to the Financial Services Royal Commission.

“Much of this funding had already been previously announced however, including, most significantly, much greater resourcing for the financial regulators, ASIC and APRA, for tougher enforcement.’’

Mr Thirlwell said the election was, naturally, the biggest risk to the Budget measures being implemented.

“In terms of economic risks, it’s worth remembering that while commodity prices and the terms of trade can giveth, they can also taketh away.

“ Higher commodity prices have provided a useful boost to budget revenues, but the longevity of these gains is, as always, questionable. The assumption of an economy growing at around trend is also subject to downside risks.’’