Look Beneath Australia's Election Budget for Economic Weak Spots

(Bloomberg) --

Australian Treasurer Josh Frydenberg will have buoyant commodity prices and a hiring bonanza on his side Tuesday when he presents a budget that’ll nevertheless also reveal the economy’s weaker underbelly.

Prime Minister Scott Morrison’s government is expected to dish out about A$9 billion ($6.4 billion) in tax cuts and cash handouts in a bid to win back voters ahead of a likely May election. Even after that splurge, there’s set to be a forecast budget surplus, which would end the longest stretch of deficits since at least 1970.

Australia to Cut Taxes for Low to Middle-Income Earners: ABC

Any fiscal bounce may prove to be theoretical as an expected loss for the coalition government means the blueprint probably won’t be legislated. For those looking beyond next month, the budget announced in Canberra on Tuesday evening should offer clues to the outlook for an economy that’s seeing stark contradictions -- a strong jobs market and robust exports versus slowing consumption and economic growth amid tumbling house prices.

Here’s a look ahead at some major themes driving Australia’s budget outlook.

1. Household vs Government Spending

Australians are being squeezed by high debt and weak wages. With the worst property slump in decades, household wealth has dropped to the lowest level in seven years. That’s seen private consumption -- which accounts for almost 60 percent of GDP -- decelerate sharply.

Indeed, the economy might have come close to contracting recently if the government hadn’t stepped up: whether through hiring for its disability care program; expanding health and aged services to cope with retiring baby boomers; or building roads, railways and airports to catch up with the requirements of a rapidly increasing population.

That means the budget’s estimates for consumption and government spending will be key, particularly for a Reserve Bank of Australia under pressure to cut interest rates and weighing how much extra support the economy receives.

2. Temperamental Commodities

Australia’s budget has roared back to surplus on a rebound in commodity prices. The speed of the current turnaround is surprising -- only two years ago Australia was at risk of losing its cherished AAA rating.

Furthermore, Australia’s Department of Industry, Innovation and Science last week said that higher prices of iron ore and coal amid supply disruptions will help lift revenue from resources exports to a record in fiscal 2019. Earnings in the year through June are forecast to be A$13.8 billion higher than a December estimate thanks to stronger iron ore prices and a weaker local currency.

An ever-present risk for Australia is that stimulus is financed from cyclical upswings -- higher commodities and employment. Revenue could dissipate just as easily as it emerged, while the budget will need to keep financing tax cuts.

3. Surging Tax Burden

The other key driver of the budget’s recent rivers of gold has been personal income tax revenue as employment surged, pushing the jobless rate down to the current eight-year low of 4.9 percent.

Even with limited wage gains in recent years, workers eventually move into higher tax brackets -- lifting the government’s take at the expense of cash that could boost demand in the economy. Alex Joiner, chief economist at IFM Investors, noted that income tax payable has increased 16 percent since 2012 on a per capita basis, while household incomes have fallen 2.5 percent.

In other words, he says, “election or not, Australian households are due some tax relief.”

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net;Garfield Reynolds in Sydney at greynolds1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, Chris Bourke

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