'Without increasing taxes'

A Treasurer's speech is usually a budget document. It is crafted as a budget document by the Treasurer's advisors to include lots of relevant facts. This speech was crafted primarily as a political speech. Much more work has gone into it than is usually the case. It is a document about communication, not just facts.

Figure 1: Major economic parameters

SOURCE: Budget Paper No 1: 2019-20, Table 2: Page 1-8

Frydenberg is communicating that he can provide a greater amount of spending to a broader range of political need groups than anyone thought possible. While everybody has been talking about how bad the economy is, Frydenberg is finding money whenno one thought it was possible.

The economy,while not in a boom, is an economy that is doing much better than most of us had suspected. We can see this in Figure 1,drawn from Budget Paper No.1, page 1-8. This shows us that growth should accelerate from 2.25% in 2018-19 to 2.75% in 2019-20. It holds that growth rate of 2.75% in 2021. The result of this is that unemployment stays at its current low level of 5%.

Inflation, after falling to 1.5% in 2018-19, rises to 2.25% in 2019-20, and 2.5% in 2020-21. This suggests there will be no increase in the Australian cash rate, at least as far as 2020-21.

Wages growth, on the other hand, accelerates. After 2.5% growth in 2018-19, wages rise to 2.75% in 2019-20, and 3.25% in 2020-21. They rise by 3.5% in 2021-22.

Figure 2: RBA Index of export prices in $US

SOURCE: Reserve Bank of Australia

At a time when the economy is believed to be weak, how can Frydenberg achieve such magical results? Budget Paper No. 2, page 2-20 shows this as an improvement in the terms of trade. We have shown it in our Figure 2 above more simply as an increase in commodity prices. Figure 2 shows Australian export commodity prices as the index of commodity prices in $US terms, which arepublished by the RBA. Figure 2 shows us the RBA numbers from January 2015 to now.

The period since December 2015 has had a dramatic rise in Australian export commodity prices. Back in December 2015 the commodity price index in $US terms,stood at 68.6. By March 2019, this index of export prices had risen to 112.4. That is an increase of 63.8% in $US terms in a little over three years. The increase in the Australian dollar terms over the same period is a slightly higher 67.8%.

These higher commodity prices allow higher nominal growth in GDP and higher tax receipts by the government fromcommodity exporting firms. This increasing tax revenue generates an improvement in the underlying cash balance. We can see the underlying cash balance in Figure 3. In 2018-19, the cash balance is only $4.2billion in deficit. This moves to a surplus of $7.1 billion in 2019-20 and $11 billion in 2020-21. Further surpluses are projected in the following years.

Figure 3: Budget aggregates

SOURCE: Statement 3: Fiscal Strategy and Outlook – Table 1 - Page 3-5

This improvement in the underlying cash balance is shown most dramatically in Figure 4. Here we can see the underlying cash balance rising as a percentage of GDP. Even though this budget provides significant increasesin spending, the increase in revenue growth is greater. Year by year, the budget surplus becomes stronger and stronger.

Figure 4: Underlying cash balance projected to 2029-30

SOURCE: Statement 3: Fiscal Strategy and Outlook – Chart 2 - Page 3-11

Where the money goes

In Figure 5 below, we see expenditure outlined in Budget Paper No.1: Budget Strategy and Outlook 2019-20; Statement 5, Expenses and Net Capital Investment. This Budget proposes to spend a total of $500.9 billion. The largest section of spending by far remains Social Security and Welfare. This will consume $180 billion or 36% of total spending. Next comes Other Purposes. What you ask, is Other Purposes? This is the servicing of Australia's sovereign debt. It is the money we pay in interest for the national credit card. Spending here at $98 billion is bigger than every other sector of spending with the exception of one. This will consume 19.6% of budget expenditure.

Figure 5: Estimates of Australian General Government Expenses by Function

SOURCES: Budget Paper No.1: Budget Strategy and Outlook 2019-20 Statement 5, Expenses and Net Capital Investment; Morgans

In Figure 6 below, we see expenditure outlined in Budget Paper No.1: Budget Strategy and Outlook 2018-19 & 2019-20; Statement 5, Expenses and Net Capital Investment. We see the estimated increases in Australian government spending by sector. We calculate these as the increase in the Budget for 2019-2020 over the budgeted expenditure a year ago in the Budget for 2018-2019.

Figure 6: Estimates of Increases in Australian General Government Expenses by Function

SOURCES: Budget Paper No.1: Budget Strategy and Outlook 2018-19 & 2019-20 Statement 5, Expenses and Net Capital Investment; Morgans

What this Budget does

This Budget does so many things. As well as the return to surplus, it provides a twostep plan to deliver $158billion in personal income tax cuts. In addition to previous personal income tax cuts of $144 billion, this brings the total personal income tax cuts to $302 billion.

Tax payers earning up to $126,000 a year will receive a tax cut. For single income families, this is a tax cut of $1,080 per year. For families on a dual income, this is a tax cut of $2,160 per year. These reductions in taxes will flow after tax returns for the 2018/19 financial year are submitted.

The second change is the lowering of the 32.5% tax rate to 30% from 1 July 2024. This will cover all tax payers earning between $45,000 and $200,000 and will mean that 94% of tax payers will pay no more than 30c in the dollar.

Small business is supported by cutting the corporate tax rate of small companies to 25c in the dollar. There is an instant write-off for small investments up to $30,000.

The Coalition is boosting infrastructure spending to $100 billion over the decade. A list of projects was announced, covering all States. The government announces a skills package costing $525 million. This will create 80,000 new apprenticeships. The incentive payment to employers is doubled to $8,000 per placement. These new apprentices will also receive a $2,000 incentive payment.

The government is establishing a $20 billion medical research fund. There is also more than $400 million in the Budget for Genomics Research to further unlock the secrets of DNA.

The Budget also includes a $3.5 billion climate solutions package. $2 billion of this will go to practical emission reduction activities, working with farmers and Indigenous communities.

Conclusion

While no one was looking, Australian export commodity prices have been rising over the last three years. This has generated a larger increase in Federal government revenue than anyone suspected. This has allowed the government to balance the Budget, at the same time as providing tax cuts and handouts just before election time.

This Budget has also allowed one of the better crafted Treasurer's addresses in recent years. This is not just an election Budget. This is the opening speech of an election campaign.