2010 Federal Budget Economic Analysis

8/6/2019 2010 Federal Budget Economic Analysis

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From China with love

Michael Blythe Michael Workman John Peters James McIntyreChief Economist Senior Economist Senior Economist Economist

-FX Economist Interest Rate Strategist Information Services

May 2010


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Important Information

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Contents

Chart No.

-

Budget basics

the numbers at a lance 7-8

the Budget arithmetic 9-11

Key policy measures 12-17

Sectoral implications 18-25 Scoring the Budget

fiscal strategy 26-29

the Budget & the cycle 30-31

-

forecast credibility 35-39

the Bud et & the lon -run 40

3

The Budget & financial markets 41-48


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Summar

The underlying Budget deficit for 2010/11 is put at $40.8bn (2.9% of GDP) vs. . .

The improved economic backdrop allows a faster return to surplus (in

2012/13, three years sooner than previously thought).

The economy is expected to grow at 3% in 2010/11 and 4% in 2011/12.Inflation forecasts look unrealistically low.

The Budget adheres to the GFC exit strategy and the medium-term fiscalframework.

-requirements and more could be done to make way for the resources boom.

The rapid return to surplus and a peak government debt level of 6.1% ofGDP provides protection against the current bouts of global risk aversion.

Financial markets were largely unmoved by the Budget.

4

Smaller deficits imply a lower financing task.


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Our View

The Questions To Ask Comment

Does the Budget adhere to the exit

The exit strategy involves saving revenue gains, capping real spending growthat 2%pa and paying for new spending with cuts elsewhere. Revenue trendslook consistent with GDP growth profile suggests revenue gains are being

strategy from GFC stimulus?.

spending funded by tax measures rather than savings (eg health/tobaccoexcise, superannuation/RSPT). Some reliance for funding on the contingencyreserve and deferral of CPRS helped.

Does the Budget adhere to themedium-term fiscal strate ?

Surpluses return and net worth improves marginally. But the Budget numbers

do rely on robust growth early on and an extended period of high commodityprices to do most of the work. There is also some tendency for the big ticketspending proposals to have delayed start dates while savings measures aremore u front. The revenue share is ke t below the 2007/08 tar et level. Thetask is, however, made easier by ABS revisions to the size of the economy.The 2007/08 GDP level was revised up by $50bn over the past year - allowingan extra $12bn of revenue to fit under the cap.

Short-term stimulus measures were unwound b earl 2010. The chan e in the

Is the Budget appropriate for ourposition in the business cycle?

underlying Budget balance over the two years to 2011/12 a reasonable proxyfor the degree of fiscal effort is equivalent to 3% of GDP. But the full impactof longer-run infrastructure measures is yet to be felt. And todays Budgetactually boosted infrastructure-related spending. Some commentators argue

5

- .very high payoff to private sector productivity from public capex a 1% rise inthe public capital stock lifts private sector productivity by 0.4%. Strong case topush on with this spending and ignore cyclical issues.


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Our View

The Questions To Ask Comment

Aspects of the recovery have significant funding requirements (infrastructure,business capex and housing). Governments (Federal and State) will remain

net borrowers for the next few years. So our reliance on lending by the rest ofworld is set to rise sharply. Potential implications include: a larger current

allocation? Or make way for theresources boom?

account deficit bringing with it risks to the AUD and interest rates; a highleverage to the global recovery and exposure to shifting risk appetite; and aneed for the household sector to do some of the heavy lifting by reducing netborrowing. Higher interest rates are one way of shifting resources fromhouseholds to other arts of the econom . But the tax cut due on 1 Jul andother developments (eg rising wealth) are working in the other direction.

Are the Budgets economicparameters credible?

The Budgets economic activity forecasts look reasonable for an economyfacing a terms-of-trade-driven income boom. But we would regard the

.

Will the Budget help protect the

economy from global financial

Australias fiscal position is extremely sound. Ratings agencies have confirmedour AAA status. Peripheral economies like Australia will always suffer duringperiods of risk aversion. But a vastly superior fiscal position means a degree ofmarket discrimination favouring Aus should be evident over the medium term.

The three variables that influence longer-run economic developments arepopulation, participation, productivity. Policy makers do have a tendency toclaim all measures will support these longer-run aims. Many of the Budget

6

improve longer-term outcomes?

proposals do, however, tick the right boxes. The focus on training, education,

superannuation and infrastructure spending is attractive. Lift in SuperannuationGuarantee Rate a plus for retirement savings and fiscal sustainability.Rationalisation of health spending a plus.


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The Numbers at a Glance

Back in black

Underl in cash deficit for 2010/11

33

FISCAL INDICATORS

(deficit(-) / surplus(+))

% of

GDP

% of

GDP

put at $40.8bn (2.9% of GDP) vs$57.1bn (4.4%) now expected in2009/10.

Return to surplus in 2012-13, threeyears ahead of previous

Underlying

expectat ons.

Headlinedeficit put at $48.0bn in

-3-3 cash balance

Fiscalbalance

underlying balances thereafter.

Net debt ex ected to eak at 6.1% of

-6-6

1996/97 2001/02 2006/07 2011/12 2016/17

GDP in 2011/12.

7


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The Bud et & Bud et Pro ections

Surfing the supercycle

The never-ending stream of

surpluses in the 1-2% of GDP range33

FISCAL POSITION

(underlying balance, % of GDP)% %

.

But the very pessimistic projections

May'08Budget

of the mark.

May'10Budget

through a series of upgrades overthe past year.

-3-3

May'09Nov'09MYEFO

-6-6

2005/06 2007/08 2009/10 2011/12 2013/14

8


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The Bud et Arithmetic Pt I

No frills?

Bud et arameters u radedsignificantly nominal growth higher,employment higher, unemploymentlower.

5050

$bn

(cumulative 2009/10 to 2012/13) $bn

Cyclical improvement and otherparameter shifts over the past year-50

0

-50

0

have improved the Budget positionby $83bn out to 2012/13.-100-100

e ay u ge nc u es newspending initiatives over the next

four years worth $31bn funded by-200

-150

-200

-150

' ' v uinto the contingency reserve of $3bn.

Budgetdeficits

parametervariations

measures

Budgetdeficits

9

.


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The Bud et Arithmetic Pt II

Underlying Cash Balance ($bn)

Based on recession expectationsthat proved misplaced.

2009/10(e)

2010/11(f)

2011/12(f)

2012/13(p)

2013/14(p)

May09 Budget -57.6 -57.1 -44.5 -28.2 ~

Rising terms-of-trade and economicrecovery is boosting nominaleconomy and revenues.

(% of GDP) (-4.9) (-4.7) (-3.4) (-2.0) (~)

Plus:Parameter & oth ch

Polic decisions0.4-0.5

8.81.6

13.00.4

12.00.3

~~

Policy measures worth a net $6bnover the past year.

Equals:Nov09 Review

(% of GDP)

-57.7(-4.7)

-46.6(-3.6)

-31.2(-2.3)

-15.9(-1.1)

~~

Implied starting point

Parameter & oth chPolicy decisions

2.7-2.1

8.9-3.0

17.90.2

19.6-2.7

~~

Equals:

-57.1 -40.8 -13.0 1.0 5.4

Absence of major asset sales

deficit of $38bn.(% of GDP)(-4.4) (-2.9) (-0.9) (0.1) (0.3)

Headline Balance(% of GDP)

-59.2(-4.6)

-48.0(-3.4)

-14.6(-1.0)

-2.2(-0.1)

4.1(0.2)

10

means convergence w

underlying measures.


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Bud et Parameters

Trend growth, in target inflation

99

GROWTH & INFLATION(annual % change) %%

accelerate to 4% in 2011/12. Long-run

real GDP growth put at 3%pa.

66

Budget(f)CPI

Australias terms of trade to grow 14%to reach a 60-year high in 2010/11.

33

,

prices in the medium-term. The terms-of-trade assumed to fall by 20% over

00

GDP

.

The unemployment rate is expected to

return to 5% in the lon -run after-3-3

1988/89 1995/96 2002/03 2009/10 2016/17

troughing at 4% in 2011/12. Wagesgrowth to reach 4% by June 2012.

11

n er y ng n a on o s a se a .


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Bud et Initiatives - Summar

MeasureCosts over next

4 years, $bn Comment

Resource Explorationrefundable tax offset

1.81Part of Resource Super Profits Tax (RSPT) reform

package. The RSPT will enhance growth and

taxation of resources. Proceeds will be used to lowercompany tax rate, support small business, and boostretirement incomes of Australian workers. Addresses to

.

Personal income tax cuts.- Lifts the low income tax 3.80

Eases cost of living for households. Continues processof simplifying and making more efficient tax system.Hel s encoura e workers from benefits to art-time

offset to $1,500.

work. Effective tax-free threshold raised to $16,000 forlow income earners.

Standard $1,000 income 1.41 Simplifying income tax returns. Will help 6.4 million taxax e uc on or taxpayers.

payers. ar s - . a es ax re urns a rer ansimpler, and reduces processing costs for ATO.

Lower tax on savings via50% discount on interest earned (up to $1,000) on bankdeposits. Gets tick as another policy aimed at boosting

12

bank deposits..

national savings pool and increasing deposit flows for

banks.


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Bud et Initiatives Summar Contd


4 years, $bnComment

Company tax cut

- from 30% to 28%

2.30Company tax rate cuts will lead to more investment thushelping drive increased productivity and long term

economic growth. This will mean more jobs and higher.

for increased efficiency and enhanced simplicity.

Small business instantwrite-off and simplified 1.03

Enhancing the existing depreciation concessions is arelatively simpleand effective mechanism for assisting

depreciation. small business. Removing the long-life pool and allowingsmall businesses to depreciate assets (other thanbuildings) in a single pool furthersimplifiesdepreciationcalculations. These changes will also increase the cash

Small business early startto lower com an tax rate.

0.55

flow of small businesses, in addition to reducingcompliance costsby removing the requirement tocalculate depreciation allowances and track assets for

depreciation purposes.

Infrastructure Fund. 1.44Will help infrastructure investment which will boost futureproductive capacity and increased living standards of

13

.


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Bud et Initiatives - Summar Contd


4 years, $bnComment

Superannuation -guarantee increase to12%.

0.27Suite of superannuation measures will provide a greateradequacy of the retirement funds pool and promotes

greater equity. It directly addresses issues surroundingan a ein o ulation and boosts rivate and nationalsavings. The measures will increase retirement savingsof up to 8.4 million workers.

Will boost Australias current $1.2 trillion retirement

concessional contributionfor over 50s

1.42

Superannuation 50%

savings pool by a further $85bn over next 10 years, and

$500bn by 2035.

Currently, as a result of the flat tax rate for all

discount for interest

income

1.10

Superannuation Govtcontributions tax rebate for

0.89

, -earners receive little or no concessions. Thegovernment contribution of up to $5000 will improve the

equityof superannuation tax arrangements by

low income measures

guarantee contributions made for low-income earners.The higher concessional contribution caps for workersolder than 50 gets a tick on equity grounds. It will

14

greatest need to boost their retirement savings.


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Bud et Initiatives - Summar Contd


Comment,

Renewable Energy

Future Fund 0.65

Encourage investment in renewable energy and energy

efficiency. Positive for carbon emissions reduction inlon term.

Skills training 0.41Skills for sustainable growth and building infrastructure.Will boost productive capacity and long term growthpotential of economy.

Better health and hospitals 5.61New Federal/State health agreement. Aimed at wide-ranging health and hospital system reform to delivermore efficient and better performing services.

ro ec ng our roopsborder security

1.83 Covers aviation security for passengers and air cargo.

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Bud et Savin s Initiatives Summar

MeasureSavings

over next4 yrs

Comment

Resource Super ProfitsTax (RSPT) $12bn

Promotes growth and more productivity in economy by more equitable andefficient taxation of resources with proceeds used to lower company tax

rate, support small business, and boost retirement incomes of Australian.

economy.

Revenue to help fund wide-ranging health and hospital system reform todeliver more efficient and better performing services. Measures to be

o acco xc se ncrease

$5.0bn

un e w nc u e: uper n cs, more programs or ra n ng o

nurses, and introduction of electronic health records. All measures shouldenhance human capital.

Emissions TradingScheme Delayed

$2.9bnWatch this space! Domestic and international political developments overthe next couple of years will determine where carbon reduction schemes

are headed over the medium term.

Pharmaceutical Benefits $2.0bnReforms to pricing of medicines under PBS will mean better value formone throu h ex anded rice disclosure arran ements and rice

16

c emereductions on medicines subject to market competition.


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Bud et Savin s Initiatives Summar Contd

MeasureSavings

over next Comment4 yrs

Improved GSTCom liance & Other 1.7bn Improves coverage of the tax base and improves efficiency of taxcollection.Tax Measures

Redirected Funding for Part of wider program to invest in and improve the skills of Australians ra n ng

Programs

m wor ers o e p oos e pro uc ve capac y o e economy an

promote increase in standard of living (individually and collectively).

Superannuation Co-$825m

Includes permanent reduction in co-contribution rate and maximum.

Overseas AidMethodology Changes

$1.0bn No comment.

Other ( parametervariations revenue &spending)

$5.9bnMuch stronger than forecast economic growth (with associated higherrevenues and lower spending than expected) led to increased savingsof $5.9bn, over 4 years.

17


18/50

Sectoral Im lications

Royalties: reduced prices, investment and production.

the mining industry.

Returns to industr are lowered b

ECONOMIC IMPACT OF

ROYALTIES

the amount of the royalty payment.

Fewer mines are viable. Lower

Pric

Supply curvewith royalties

Mining supplycurve

grades at operating mines areuntapped.

Pw

e

World price

returns industry to the no-taxsupply curve.P(1-r)

Production

Royaltyrevenue

Deadweightloss

RSPT taxes distribution of rents(somewhat akin to producersur lus . Price si nals and resource

Quantity mined

Qroyalties Qperfect

royalties

18

allocation unaffected.NB: specific royalty illustrated. Principles remain unchanged for advalorem.


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20/50


Progressivity garnishes higher returns.

is to exploit higher value deposits.

These have relatively lower effective6060

EFFECTIVE TAX RATE%%

+ .proportionally higher share of rents.

Share of rents constant under

5050

28% company tax

resource rent tax.

Results in effective tax rate

4040

Royalties + 30%

ncreas ng as pro ec re urns, orcommodity prices, rise.

3030

,commodity prices, fall.

Post tax returns smoothed throu h

6 10 15 20 25 50

Rate of returnSource:Treasury

20

commodity price cycle.


21/50


AAA guarantee: minimum 40% of capital refunded.

return for mining investment.

40% of undeducted ca ital

REQUIRED RETURN ONMINING INVESTMENT

%%

investment government guaranteed.

Capital deducted (i.e. returned)1212

Lower WACCpost-RSPT

before RSPT imposed.Transferability further reduces risk,and tax payments.

99

free 6%

Volatility of post-tax returnsmarginally smoothed by operation of33

60% capital@ risk - 15%req. return

100% capital@ risk - 15%

req. return . .profitable, lower tax paid when lessprofitable).

00

Current post-RSPT

21


22/50


If it cant move, tax it!

change in the burden of taxation.

Internationally mobile capital to bear63

TAX TAKE(% of GDP) %%

2007/08 level

lighter tax load.

Immovable tax bases (like land and52

Company tax+

PRRT& RSPT(rhs)

-

likely to generate economic rents.

Company tax(rhs)

revenue in 2013/14.

But offset by 0.4% of GDP fall in

41

Resource Rent Taxes(PRRT & RSPT) (lhs)

company tax take.

Tax mix relatively unchanged at

30

2001/02 2004/05 2007/08 2010/11 2013/14

22

rom eve s.


23/50


Wheres the carrot? Discount on interest earnings.

interest earnings.

A lies to: de osits bonds2525

DEPOSITS GROWTH(annual % change) %%

debentures; and annuities.

Positive for household budgets. But

2020

Deposits(M3 less currency)

unlikely to be a significant boost tostock of deposits.

10

15

10

15

lift foreign bank competition.

First home saver accounts more

55

Source: RBA. flexible. Still unattractive.00

Jan-2000 Jan-2003 Jan-2006 Jan-2009

23


24/50


Clean technology: Renewable energy future fund

clean technology (CPRS) delayed.

652mn over four ears forRenewable Energy Future Fund.

Exact details unclear. Funds tosupport development anddeployment of renewable energyprojects.

Spending unlikely to offset impairedeconomics arising from CPRS delay.

Henry Tax Review response includes$1.1bn Resource Exploration Rebate.Geothermal ex loration included.

24


25/50


Transport & infrastructure: real spending remains elevated

.$5.6bn over decade, starts with

$700mn in 2012/13.

improve rail competitiveness.

Adds to already committedexpenditure of $36bn.

terminal (2013-2016).

25


26/50

Scoring The Budget

The medium-term fiscal framework :The Budget & fiscal strategy

achieving budget surpluses, onaverage, over the medium term;

30

%MEDIUM TERM OUTCOMES

(to 2013/14, % of GDP)

, ,below 2007/08 (23.6% of GDP);

improving Government net financial15

worth over the medium term.

The exit strategy from GFC stimulus:0

sav ng revenue ga ns;

a 2% limit on real spending growth;

spending.

The exit strategy and movement

-

Deficit Revenue Ch in NetFinancial Worth

26

towards the medium-term objectives

are on track.


27/50

Scoring The Budget

The exit strategy Pt I

Total revenue expected to rise by 9.4%in 2010/11, or 22.9% of GDP.

Revenue growth thereafter runs in 6-2020

REVENUE & GROWTH(annual % change)% %

11%pa range.

Revenue trends look consistent with

(f)Nominal

GDP

grow pro e sugges s

revenue gains are being allowed toflow through to the bottom line.

Revenue share is below 2007/08 targetlevel (23.6% of GDP) the task made

00

Nominal level revised up by $50bn over pastyear - allowing an extra $12bn of

-10-10

1979/80 1987/88 1995/96 2003/04 2011/12

27

.


28/50

Scoring The Budget

The exit strategy Pt II

REAL REVENUE & RECOVERIESGDP GROWTH & RECOVERIES

1010

(trough at t=0)%pa %pa

66

(trough at t=0)% %

Currentassumptions

5544

00

Average 1974/75,1982/83,1990/91

22

Average 1974/75,1982/83,1990/91

-10

-

-10

-

2009/10

-2-2

Expected GDP growth path underlying Budget a little stronger than average

-2 -1 0 1 2 3 4 5 6Years from trough

-2 -1 0 1 2 3 4 5 6Years f rom trough

28

Expected revenue profile mirrors the growth trajectory.


29/50

Scorin The Bud et

The exit strategy Pt III

The 2% limit for growth in real

spending is met.1616%

REAL GOVERNMENT SPENDING(annual % change)%

Long-run average: 3.2%pa

The fiscal effort is a middle-of-the-roadtype outcome compared with previousefforts at fiscal repair.8

12

8

12

2%pa

Other measures of real spending such as government own purpose

44

consump on spen ng sugges aslight slippage towards the end of theprojection period.-4-4 "Banana

"

Early CoalitionBudgets

-8-8

1979/80 1987/88 1995/96 2003/04 2011/12

29


30/50

Scoring The Budget

The Budget & the cycle

Budget stimulus is unwinding butfears of a pro-cyclical fiscal policywill persist.

33.0

FISCAL STIMULUS((-) stimulus / (+) contraction))% %

impact of infrastructure spendinghigher than for other stimulus

.

Fiscal Multipliers(impact by year 2)

.

Infrastructure 1.1-1.3

Government consumption 0.7-1.0

Transfers to households 0.7-0.8

-3-3.0

Ch in underlyingbalance*

(% of GDP)

Personal income tax cuts 0.4-0.8

Indirect tax cuts & other 0.3-0.5

Source: OECD

-6-6.0

1979/80 1987/88 1995/96 2003/04 2011/12

30


31/50

Scoring The Budget

Short-term stimulus measures

Push on regardless

unwound by early 2010. Impact oflonger-run infrastructure measures

ongoing (and boosted in Budget).3333

THE PUBLIC CAPEX PIPELINE(value of public sector work yet to be done)

$bn$bn

Now debate over whether thisspending should be delayed risk

-2222

.

Earlier studies show a very highpayoff to private sector productivityrom pu c capex a r se n e

public capital stock lifts privatesector productivity by 0.4%.

Strong case to push on with thisspending and ignore cyclical issues.

00

Sep-87 Sep-91 Sep-95 Sep-99 Sep-03 Sep-07

31


32/50

Scoring The Budget

The fundamental problem

*

8615

%%

Capacityutilisation*

33

(% of GDP) %%

2010/11

8212

(rhs)

Average 1

2

1

2

789

NAIRU

00

2011

746Unemployment

rate (lhs)

* -

-1-1

Source: CBA calculations

/12

Recover is commencin at a oint where s are ca acit is limited.

703

Sep-89 Sep-93 Sep-97 Sep-01 Sep-05 Sep-09

-2-2

1994/95 1998/99 2002/03 2006/07 2010/11

32

The resources boom will boost income and spending.


33/50

Scoring The Budget % %AUSTRALIA: NET LENDING BY SECTOR(% of GDP)

Aspects of the recovery have

Making room for the resources boom

8

12

0

4 Households(lhs)

significant funding requirements(infrastructure, business capex and

housing).0

4

-8

-4

Governments will remain netborrowers for the next few years.

-

-8

-4

-

-16

-12

Business(rhs)

So our reliance on lending by rest ofworld set to rise sharply 20

24

4

8

Government(lhs)

Implications:

current account deficit to widen 12

16

-4

0

high leverage to global recoveryand risk appetite;

4

8

-

-12

-8

33

.

-4-20

1980 1984 1988 1992 1996 2000 2004 2008

Rest of World(rhs)


34/50

Scoring The Budget

A near full-employed economy needs

The churn

to make room for what appears anunstoppable mining boom.2

%IMPACT ON H/H SPENDING POWER

(% of 2009/10 h/hold after tax income)

Budget

back towards net lender status willhelp.

1

Rate Petrol at

measures

(over 4 years)

But household sector will have to do

some of the heavy lifting by reducingnet borrowing.

0

Julytax

cut

Higherhouse

prices

Standardtax

deductions

50%discount

Recent policy moves and otherdevelopments look to provide a net

stimulus to the household sector.-2

-excise

Mortgages Petrol Taxes Wealth Tobacco Taxreturns

Interestincomediscount

34


35/50

Scoring The Budget

GDP growth forecasts look credible.

Forecast credibility 2009/10(e)

2010/11(f)

2011/12(f)

ssump on o re urn o ren pa pos2011/12 looks conservative. Further upgradespossible?

Consumer numbers look a tad ambitious in a

ea c 4

Of which:

H/hold consumption (% ch) 23

/4 31

/2 4rising interest rate environment maindomestic downside risk.

A substantial lift in residential construction.

Dwelling Investment (% ch) 3 71/2 4

Business Investment (% ch) -2 7 121/2

1 -1

Strong business capex looks locked in for thenext few years.

Economy pushing towards full capacity and

4 2

Ch in inventories (contrib) 3/4 1/2 0

Net exports (contrib) -3/4 -1 -3/4

large income boost from commodity boom butinflation tracks at midpoint of RBA 2-3%target?????

- -

CPI (% ch yr to June) 31/4 21/2 2

1/2

Wage Price Index (% ch yr toJune)

23/4 33/4 4

an important boost for company profits andgovernment revenue.

Slow progress given rapid growth in working-

Nominal GDP (% ch) 23/4 81/2 5

3/4

Employment (% ch) 21/2 21/4 2

Unemplo ment (%, June) 51/ 5 43/

35

age population and recovery in hours worked.

Current A/c def (% GDP)-43/4 -3

3/4 -5


36/50

Scoring The Budget

Treasury vs RBA

ew reasury ew

Global Backdrop

Global growth above average at 4-4%

with a skew towards Australias key Asiantradin artners.

Global growth of 4.25% expected in both

2010 and 2011. China to grow 10% thisear.

Terms of tradeRising strongly and will probably exceed2008 peak before easing over medium termas extra supply comes on stream.

Likely to reach a new peak in 2010-11.Increased supply of non-rural commoditiesto push export prices down in medium-term.

Econom runnin at an above-trend ace Economic rowth to accelerate to 4% bGrowth by end 2010 and pushing towards 4%pa by

end 2012.

2011-12. Economy to reach full capacity in

2011-12.

Labour marketSolid employment growth and a gradualfall in the unemployment rate.

Unemployment to fall to 4%, near the fullemployment rate.

InflationUnderlying inflation to bottom out at 2% in2010/11 before trending up to 3%pa in2012.

Underlying inflation to stabilise around2.5%.

Risks

,removal of policy stimulus restrainsconsumer activity. High real exchange ratecould dampen manufacturing and tourism.Internationally, public debt sustainability and

There are both upside and downside risksto global economic growth which could flow-through to Australia. Domestic labourmarket constraints could feed into upsiderisks to inflation. Stresses on the Australian

36

risks. Main upside risk is an intensificationof the commodity boom.

economy could also come from a strongmining boom.


37/50

Scoring The Budget

Sustaining the recovery

the Asia-China-commodities terms of trade boom;

a residential construction upturn;

a robust labour market.

The Budget has no direct initiatives impacting on these drivers.

But the im ortance of the terms-of-trade stor in su ortin the Bud et andthe economy is evident everywhere.

37


38/50

Scorin The Bud et

The terms of trade

The Bud et assumes that the termsof trade rise to their highest level in60 years in the forecast period.

This will boost nominal outcomesand support recovery in the private

Substantial global supply response.

boom in mining investment.

At end of forecast period, terms oftrade to remain 80% above averageof pre-boom decade.

38


39/50

Scorin The Bud et

Financial market protection

150150

%%

Source: IMF

(% of GDP)

2121

(gen gov, % of GDP)% %

Budget

100100

vanceeconomies1414

5050

-77

Emerging &developingeconomies

World

-7-7

Budget surplus from (year) and public debt set to peak at 6.1% of GDP.

00

1950 1960 1970 1980 1990 2000 20101974/75 1983/84 1992/93 2001/02 2010/11

39

Fiscal backdrop very good on any global comparison offers a high degree of

protection from global fears about fiscal sustainability.


40/50

Scorin The Bud et

Long run: the three Ps

The variables that influence lon er-run economic developments arepopulation, participation, productivity

(or the 3Ps)

PARTICIPATION RATES

(as at May 2007)%

Policy makers tend to dress up allmeasures as adding to the 3Ps.75

Source: ABS/CBA

No Budget measures to influencepopulation. Migration policies are50

.

Participationshould benefit from

increased s endin on skills and

25

training and health.

Productivitybenefits from increased

0

With a non-schoo l

qualification

Without a non-schoo l

qualification

40

n rastructure un ng an s s.


41/50

The Bud et & Financial Markets

Market reaction

Money and currency marketslargely ignored the Budget.

Rating agencies say Budgetunlikely to affect creditratin .

41


42/50

Public debt sustainability

There has been a significantimprovement in the Budget2020

COMMONWEALTH NET DEBT

% GDP

Australia remains very favourably12

16

12

1609/10 F'casts

10/11 F'casts

positioned compared to global

peers.4

8

4

8

Net interest payments are forecastto be only 0.4% of GDP, a very light

-

0

-

0

.--71 75 79 83 87 91 95 99 03 07 11

Financial Year Ending 30 June of

42


43/50


44/50

The Bud et & Financial Markets

Bond issuance The Budget papers provide limited

.

AOFM is expected to provide a

further update.60

70

60

70

CGS ISSUANCE

Total borrowing is forecast to rise to$59bn in 2010/11.

40

50

40

50

n ,

refinancing of existing debt. New bond issuance is expected to

20

30

20

30

$

billio

. , . .

2010/11 issuance to be made up of:

-10

0

-10

0

$4bn of Linker Bonds;

06/07 08/09 10/11 12/13

New Issuance Refunding of Existing Debt Stock

44

$1bn.


45/50

The Bud et & Financial MarketsCBA forecasts

POTENTIAL AOFM ISSUANCE PLAN

14

16

18

14

16

18

8

10

12

8

10

12

0

2

4

0

2

4

Total issuance of Coupon CGS is expected to be $56bn.

Jul-10 Jan-12 Jul-13 Jan-15 Jul-16 Jan-18 Jul-19 Jan-21 Jul-22

Existing Coupon Bonds New Coupon Bonds

e expect t ree new nes n 2010-11 w t matur t es at approx mate y:

Dec-15; Nov-17; and May-23

45

- - - -

However, AOFM needs to leave space for later issuance too.


46/50

The Bud et & Financial MarketsNew issuance profile

The AOFM has suggested a split of

$56bn of coupon issuance and350350

$bnCGS BONDS OUTSTANDING

$bnSource: CBA, AOFM, Budget Papers

$4bn of inflation linked issuance.

250

300

250

300Coupon bonds outstanding

Treasury Notes

Indexed linked bonds

-est.

ere s no men on o an u ra-

long bond, yet.150

200

150

200

Total

Nov-09 est.

The amount of Treasury Notesoutstanding is expected to drop to

$10bn.50

100

50

100

00

90/91 94/95 98/99 02/03 06/07 10/11

46


47/50

Savin s & Credit Flow

Measures to ease the flow of credit

The Government has announced measures to increase the

flow of credit.

The Government will

grant a 50% discount on interest income.

reduce Interest Withholding Tax for banks.

reform and simplify retail bond disclosure requirements.

47


48/50

Savin s & Credit Flow

Measures to ease the flow of credit will they succeed?

Firstly, we applaud the intent.

Australian banks face a significant funding task which is currently metby offshore funding.

, , .

In doing so they will, at the margin, decrease retail and businessborrowing costs.

None appears likely to be the silver bullet however.

financial centre.

48


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2010 Federal Budget Economic Analysis

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