The 2019-20 Budget had three aims: to cement the Government’s fiscal credentials by delivering the long-awaited return to budget surplus; to provide fiscal stimulus to an ailing economy; and to help get the Government re-elected. It looks on track for the first thanks to a revenue windfall, this has provided room for fiscal stimulus and of course time will tell whether it makes a difference in the May election.

Of course, while whoever wins the election will provide stimulus next financial year its timing and precise makeup won’t really be known for some time.

Key budget measures...

The goodies include:

Income tax cuts from July focussed on low to middle income earners of an additional $10 a week (following last year’s announced tax cut of around $10/week) which is mainly achieved by doubling the Low & Middle Income Tax Offset.
More generous tax stimulus in later years especially for higher income earners (which builds on the tax changes announced in last year’s budget), starting in 2022 with an expansion in the 19% rate tax bracket and a reduction in the 32.5% rate to 30% in 2024.
Expansion of the small business instant asset write off by $5,000 to $30,000 until 2020 (which is also now extended to medium-sized businesses) and a drop in small business company tax to 25% earlier than expected.
A $75 to $125 cash payment to 3.9 million pensioners and other welfare recipients.
Greater flexibility for 65 & 66 year olds to top up their super.
Spending on energy efficiency measures including an equity injection of $1.4bn on the Snowy Hydro project.
An extra $25bn in infrastructure spending over the next decade including $2bn for a rail from Geelong to Melbourne, and a large allocation to NSW transport projects.

Implications for Australian assets...

Cash and term deposits – with interest rates set to fall, returns from cash and bank term deposits will remain low.

Bonds – a major impact on the bond market from the Budget is unlikely. With Australian five-year bond yields at 1.4%, it’s hard to see great returns from bonds over the next few years albeit Australian bonds will likely outperform US/global bonds.

Shares – the boost to household spending power could be a small positive for the Australian share market (via consumer stocks) and there is an ongoing boost for construction companies. But it’s hard to see much impact on shares.

Property – the Budget is unlikely to have much impact on the property market. Sydney and Melbourne home prices are expected to fall further.

Infrastructure – continuing strong infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised.

The $A – the Budget alone won’t have much impact on the $A. With the interest rate differential in favour of Australia continuing to narrow the downtrend in the $A has further to go.

Conclusion

The 2019-20 Budget has a sensible focus on providing support to households at the same time as returning the budget to surplus. However, the actual fiscal stimulus is pretty modest - particularly for a pre-election budget - and comes with greater than normal uncertainty given the upcoming election.

For a detailed breakdown of this year’s Federal Budget, including tax tables, view here.