Federal Budget 2018: A Mixed Reaction

By Deepta Bolaky

Treasurer Scott Morrison handed down his third incorporating tax cuts, superannuation benefits, aged care spending and significant infrastructure spending. The highlight is its plan to hand out $140 billion in tax cuts over the next 7 years possibly making the budget a strong “pre-election” one. It also focused on providing immediate tax relief to the low and middle-income earners by proposing an “offset at the end of the year” effective from 01 July 2018.

The government plans to partly compensate for the loss in revenue from the income tax cuts by taxing illicit tobacco and putting a $10,000 cap on cash payments in an attempt to crackdown on the black economy.
The Australian economy entered its 27^th consecutive year of growth and bringing back a budget surplus within the next 2 years appears to be a realistic expectation according to the government. It is also expected that by 2028-29 net debt will decline to 3.8 per cent of GDP.

Source: Business Insider
Reactions from the markets so far…
Whilst most sectors saw positives out of the proposed measure and policies, it was hard to see the same reaction from the financial sector which makes up almost 30 per cent of the S&P/ASX200 (by market capitalization) after the announcement of a new (proposed) tax on bank liabilities.
Consumer discretionary and Consumer staples were mostly positive as tax cuts are expected to boost consumer confidence and spending, seen as favorable for underlying stocks.
Infrastructure and Healthcare also got a lift following the proposed spending plans and policies.
No exit fees, a cap on annual fees for superannuation and an overhaul for R&D refunds were understandably drivers of a sell-off in Biotech and Superannuation stocks.

Source: Bloomberg
The positive sustained reaction from Bond markets is expected to last as the early balance surplus is a quite a crucial factor to consider since it will give support to the country’s AAA credit rating.  The initial impact on the Australian Dollar remains mixed so far.  However, it is worth keeping an eye to see how the Budget will unfold over the coming weeks and months.