A “Labour-Like” Budget by the Liberals

A “Labour-Like” Budget by the liberals

Treasurer Scott Morrison has delivered his second budget on the 9^th of May 2017. It is claimed to be politically correct with focus on key issues such as major banks, multinationals, affordable housing and foreign workers together with a “big spending” economic plan.
This budget has left little room for criticism or counter attack by the opposition being more of a “Labour Party” type of budget. The Treasurer focuses on the “Right choices to secure better days ahead”.
A generation of Australians has grown up without ever having known a recession. “However, not all Australians have shared in this hard-won growth. Many remain frustrated at not getting ahead” says Treasurer Scott Morrison.
The budget has been delivered with a commitment to engage in promoting fairness and creating opportunities for all Australians. It concentrates more on raising revenue through a tax hike on banks, workers, foreign investors and smokers rather than controlling spending.

Source: The Australia

The Treasurer has embraced his views about “good debt” and “bad debt” in the budget and supported on a “good debt” – infrastructure investment.
Infrastructure projects generally have a huge multiplier effect on the economy. With a new western Sydney airport, inland railway connecting Brisbane and Melbourne and other infrastructure packages, the government will be able to generate employment and enhance the efficiency of production and transportation. An Infrastructure & Project Financing Agency will be set up to work closely with the private sector to gain access to innovative financing options for investments in the government infrastructure projects.

Source: The Australia

Overall, the Turnbull government has managed to give the budget a good twist compared to the previous ones and markets positively moved. With a forecasted figure of 0.3% for retail sales and 0.5% for retail sales ex-inflation earlier that day, the actual % figures fell short with -0.1% and 0.1% respectively. As a result, the AUDUSD dropped by 61.2 pips and GBPAUD gained 144 pips. The bearish trend in AUD was swiftly reversed following the release of the budget.

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Source: GO Markets MT4

However, housing affordability has been a bit of a letdown.
First home buyers will be able to save for a deposit by sacrificing into their superannuation accounts and pensioners are being encouraged to downsize with an off-contribution capped to $300,000 into a superannuation fund.
Would those measures be enough? Has the government attempt to tackle the housing problem of more demand than supply in the market?
The S&P Global Ratings had Australia on a negative rating outlook since late 2016 and therefore, the latest Federal budget was designed to maintain the AAA credit rating. Australia is amongst the few countries with AAA credit rating and it has been consistent at the time of the economic prosperity. A downgrade in the rating would mean that the funding costs will be increased and very likely passed on to the borrowers in the form of higher borrowings costs. Normally, in that situation, the RBA might cut the interest rate. Can Australia afford to keep interest low deterring investors from holding Australian bonds? In a rising global yield environment, AUD might not be competitive if interest rates are kept low and it might result in an AUD sell off.
Last week, Standard and Poor’s decided to maintain the credit rating bringing temporary relief to the market. Despite an optimistic budget, S&P is not fully convinced that Australia is able to return to budget surplus and may be stripped of its AAA credit rating within the next 2 years. The credit expansion is posing a threat and it would be interesting to see what policies and strategies will be put in place by the Government to protect its economy should a bust in the housing market happen.
On the other side, following Lowe’ comments before the budget that interest rate will not always be low, a fear of an increase in interest rates might prompt consumers to pay off their mortgage debt more quickly thereby reducing consumer spending. Given that household consumption is 57% of the country’s GDP, a reduction in spending may negatively impact the AUD.
It will be interesting to follow the direction of the interest rates over the coming months and together with all the changes happening, AUD should certainly be on your GO Markets watch list.

-By Deepta Bolaky
GO Markets