Federal Budget Preview: Tax cuts; Congestion-bustingFederal Budget preview
Budget update: Latest figures show the budget to be in far better shape than previously expected: over $7 billion ahead of expectations.
Budget speculation/ measures: So far, information on the budget has largely been limited to discussion on tax and infrastructure measures. The Federal Budget can have implications for a raft of industry sectors as a result of spending and taxing decisions.

State of Play
In the twelve months to March 2018, the budget deficit stood at $14 billion (around 0.8 per cent of GDP) – the smallest rolling annual deficit for nine years. However, the rolling annual total can be affected by timing of transactions. But the deficit is substantially lower than the Department of Finance’s own estimates. The underlying cash balance for nine months to February was $7.2 billion lower than profile deficit made at the time of the midyear review. Revenues are around $5 billion higher than forecasts while spending is $3 billion short of forecasts.
The Government currently expects an underlying deficit of $23.6 billion for 2017/18. The Government expects the budget to return to surplus in 2020/21.
So where do we go from here? Some believe that the Government should stand back, allow a faster return to budget balance and then stabilise or reduce debt. Others believe that personal tax cuts should be made to lift spending and economic growth, address bracket creep and provide incentives for Australians to stay in the workforce. Increased spending on infrastructure can provide services for the growing population, reduce logjams and lift productivity. Expect to hear a lot about ‘congestion-busting’ projects in the budget.
The Reserve Bank expects the economy to grow by 3.25 per cent in 2018/19 – at or above ‘sustainable growth’ – and up from the expected growth of 2.75 per cent in 2017/18. The International Monetary Fund expects the global economy to grow by 3.9 per cent in 2018 and 2019, above longer-term averages
The cash rate remains at a record low of 1.5 per cent. The Aussie dollar is near US76 cents. 
Budget speculation/announced measures (various media sources)
The Federal Treasurer has announced that the government will not need to increase the Medicare Levy from 2 per cent to 2.5 per cent to fund the National Disability Insurance Scheme.
Speculation about a middle-income tax cut including reduction of the 32.5 per cent tax rate to 30 per cent. The cost to the budget is estimated at $6.7 billion. Taxpayers on $65,000 a year would save $13 a week in tax.
Also proposed is a $5,000 lift in the top three income tax thresholds.
Proposed tax cuts to be phased in over a period of 10 years.
Passenger and freight rail projects centred on Queensland including Brisbane Cross River Rail Link, Brisbane metro and Acacia Ridge to Brisbane port freight rail. Also regional rail in Victoria. In NSW the Badgery’s Creek airport rail project. In Perth funding would be provide for the Metronet.
Rail projects would be part of a $1 billion road and rail package.
Off-budget infrastructure projects, including a $5 billion rail link from Melbourne’s Tullamarine airport to the CBD, and a $1 billion upgrade to the M1 motorway.
Money allocated to infrastructure projects is expected to hit $75 billion. Government to campaign on “congestionbusting infrastructure.”
Treasurer Scott Morrison has rejected speculation that it will be a big spending budget: “Australians continue to ensure their belts are tightened and the government will continue to do the same thing.”
New laws on “fracking” that would compensate farmers by giving them a share of profits if gas is found on their land.
Changes to the Research & Development (R&D) scheme including an annual cap of $2 or $4 million cap on small companies claiming the tax refund and a lifetime cap of $20 million or $40 million for companies.
Uncertainty about whether the government will extend the instant $20,000 asset write-off on new equipment purchased.
Uncertainty on changes to migrant intake of 190,000 a year. Ministers that seek a lowering of the intake must come up with proposals to offset lost revenue.
Western Australia to receive an extra $122 million a year from changes to GST relativities.
The Federal Government will invest $188.9 million in Western Australian health infrastructure: $158 million towards the Joondalup Health Campus expansion; $10.6 million towards the Osborne Park Hospital Expansion; $20.3 million towards the refurbishment of the Royal Perth Hospital.
A $400 million rescue plan for the Great Barrier Reef.
Plans for seaborne statue of Captain James Cook to be built off Port Botany as part of a $50 million redevelopment.
Possible changes to taxation of energy companies focusing on restriction of “uplift concessions” in the petroleum resources rent tax.
Superannuation: “SuperStream changes are expected to allow members to roll over their funds into an SMSF faster and with lower compliance costs.”
New spending on measures to allow the elderly to stay in their own homes.
An extra 1000 private contractors to be hired to answer Centrelink calls.
A $260 million GST top-up for the Northern Territory and $550 million for remote housing.
Why is the data important?
The Federal Budget is handed down on the second Tuesday of May each year. The Budget outlines new spending and revenue proposals that can affect the broader economy and specific industries.
What are the implications?
Expect tax cuts and infrastructure spending to dominate the budget papers. The on-going focus on infrastructure is positive for civil engineering companies, building material suppliers, infrastructure managers and operators. Tax cuts could prove beneficial to consumer-dependent businesses like retailers. But the tax cuts may be modest and rolled in over an extended period – offering relief rather than a boost to family finances.
The economy is clearly in good shape, as highlighted by the better-than-expected tax receipts. Certainly the economy doesn’t need an extra kick along. In fact many operators in the NSW construction sector fret about the ability to secure the workers to build all the projects on the books.
The Federal Budget deficit is narrowing. That means that more dollars are being taken out of the economy than are being put back by government spending. At the same time, families are adjusting to more modest real wage growth. However official interest rates are still at record lows. And with low inflation, interest rates don’t need to move for some time. So scrapping of the proposed hike in the Medicare Levy will provide relief to families. Any modest cut to taxation would again provide relief rather than cause people to go on a spending spree.
Overall, the economic state of play is encouraging. The political state of play, less so. The concern is the Senate may never be in a position to allow for any fundamental tax reform proposed by either of the major parties.
Published by Craig James, Chief Economist, CommSec