Economists are tipping a tough 2011-12 Federal Budget which will be delivered tomorrow night.
The question for investors is whether the cuts damage confidence of corporate growth.
The question is hard to answer because the budget isn’t the big influence on the corporate sector (except for tax changes for grog and tobacco for example).
And in that vein, media reports say small business will get a bonus for buying a new car, the strict rules on super contributions will be eased and lowly paid workers will get an advance payment of their annual tax exemption.
Looking more broadly at the budget and:
The AMP’s chief economist Dr Shane Oliver says softer growth and the impact of the strong $A on offshore source profits and hence tax receipts will necessitate spending cuts to offset the worse than expected starting point for the deficit and ensure a surplus by 2012-13.
Cutting spending to help control inflation and measures to boost productivity are likely to be key themes.
He says the AMP expects the main features to be:
1. Growth forecasts for 2010-11 to be revised down to 2.25% (from 3.25%), but to remain unchanged at 3.75% for 2011-12.
The Governments forecast for unemployment to fall to 4.5% by June next year is likely to be retained.
2. The Budget deficit for 2010-11 is likely to be revised up to $50bn (from $41.5bn last November), falling to $15bn in 2011-12 and to a $2bn surplus by 2012-13.
3. Expect increased spending on skills training to help boost productivity and welfare reform to encourage people to get back into the workforce.
4. Spending savings are likely from: increased departmental efficiency (possibly involving job layoffs); tougher thresholds, tests and caps with respect to accessing welfare; the possible means testing of the private health insurance rebate; measures to cut health spending including on pathology costs; tougher work tests for the childcare benefit; and possible further moves to limit access to the baby bonus.
5. Expect a change in Fringe Benefit Tax arrangements to save the Government nearly $1bn.
Other revenue measures could include changes to the taxation of family trusts, a tightening of tax arrangements for golden handshakes and the removal of negative gearing benefits for third and subsequent properties
6. Announcements on skilled migration policy and measures to encourage greater private infrastructure investment are likely.
CommSec analysts are tipping the budget deficit to be around $50 to $55 billion, significantly poorer than the $41.5 billion forecast in November.
The government may also move to alter its 2011-12 deficit prediction from $12.3 billion to somewhere in the range of $20 to $25 billion.
Bill Evans, Westpac’s chief economist says:
The Government’s November Mid-Year Economic and Fiscal Outlook (MYEFO) forecast was for the Budget deficit to narrow to $41.5 billion (3.0% of GDP) in 2010-11 from $54.8 billion (4.2% of GDP) in 2009-10.
He says it now looks like the deficit will be close to $50.5 billion (3.7% of GDP) in 2010-11, a $9 billion deterioration from the November forecast.
The 2010-11 year growth number will be revised down in the Budget, largely reflecting the impact of severe weather events.
He expects the Government to forecast real GDP growth of 2.25 % for 2010-11 (downgraded from 3.25%) and to forecast nominal GDP growth of 7.7% (downgraded from 9.0%).
He says Westpac expects the government to forecast real GDP growth of 3.75% for 2011-12 (unchanged from November’s forecasts) and 3.5% for 2012-13 (upgraded from 3%).
