Budget Overview – May 2015

Overview

The Federal Government has delivered a ‘safe’ budget with the budget balance (forecast to be $35b in 2015/16) continuing to be impacted by the weaker economic parameters. The Government has been cautious not to take too much more out of the economy in this budget while concurrently delivering a trajectory toward surplus which should allay fears of rising sovereign risk.

On the other hand, the Government is relying on improved economic conditions to return the budget to surplus, which it is forecasting will occur one year later than previously forecast.

Policies impacting household disposable income were relatively neutral, so consumer confidence shouldn’t be dented (as was the case with the previous budget) and will continue to be supported by a lower AUD, cheaper energy and low interest rates. Small businesses were a clear winner, with tax cuts that will directly benefit roughly one-third of the economy and one-third of the labour force.    

Key highlights for the property market

There were a number of measures announced that we see as impacting the property sector:

  • Small business initiatives were the feature of the budget with the tax rate for small business reduced by 1.5% (to 28.5%) and an immediate deduction allowable for equipment purchases up $20,000. Given that small businesses account for 96% of businesses in Australia, about one-third of the GDP and 4.5 million employees, the overall effects are expected to filter through to bigger businesses servicing those smaller businesses.
  • Canberra strategic office review will see the Government approach the market to test investor interest in four Canberra office properties: East Block; West Block; Anzac Park East; and Anzac Park West. The Government will consider other potential uses for these properties taking into account what could be appropriate for these areas. The Government is also working to maximise value from Commonwealth property leases in the ACT by ensuring surplus vacant office space is promptly filled by agencies with similar requirements and upcoming lease expiry dates.
  • Public service staff numbers stabilising. A somewhat discreet feature of the budget is that the decline in public service staffing may be coming to an end. After a more significant decline of 12,500 Australian public servants to 167,411 in 2014-15 (excluding military and reserves), numbers are expected to be relatively unchanged in 2015-16. This may change perception and sentiment toward the Canberra market in which the spectre of significant staff reductions has been firmly overshadowing sentiment since 2013. Some Department or Government role functions are still being assessed.
  • Developing Northern Australia. The Government will support infrastructure developments in northern Australia aimed at unlocking resources and human capital. The Government announced infrastructure spending packages for WA and Northern Australia – $500m for WA roads and $5b for Northern Australia to support port, pipes, electricity infrastructure will provide some (but only modest) offset to the mining investment headwind in these regions.
  • Foreign Investment Review Board. The Government expects to raise $0.1b rising to $0.2b from application fees to FIRB. In residential markets, most application fees will sit at $5,000 and are unlikely to have a detrimental impact on both the level of demand from foreign buyers and foreign developer activity in Australia. In commercial markets, we see a similarly muted impact with the $25,000 cost representing less than 3bp for a $100m investment.

This budget appeared to provide less shock to the economy and shouldn’t damage consumer and business confidence. The Government is expecting an economic recovery from this year, which is not dissimilar to the general market’s view, and the trajectory to budget surplus remains similar albeit pushed out one year.