baillieu holst 2016 federal budget breakfast presentation

Baillieu Holst Budget Breakfast

4th May 2016

Please read the disclaimer at the beginning of this report.

Baillieu Holst - Adelaide Office

Mike James

Alex ButlerMatthew Loveder

Darryl Gobbett Helen Dundon Ben Prisk

Alan HutchinsonTravis Adams

Darryl Gobbett

Baillieu Holst Chief Economist

Economic Update


Disclaimer

Baillieu Holst Ltd has prepared this presentation for the general information for investors. As no account has been taken of the investment objectives, financial situation and needs of any particular person, it does not represent advice specific to any particular person. Investors must decide whether information contained in this document or any recommendations whether express or implied is appropriate in light of their specific investment objectives, financial situation and needs. Investors should consider seeking professional investment advice from a licensed adviser before making an investment decision. Baillieu Holst Ltd makes no warranty as to the accuracy, reliability or completeness of any information contained herein. Except to the extent that any liability under any law cannot be excluded, no liability for any loss or damage which may be suffered by any person, directly or indirectly through relying upon any information or statement in this presentation or any of its attachments is accepted by Baillieu Holst Ltd, its directors employees or agents whether that loss or damage is caused by any fault or negligence on their part or otherwise. This document should not be substituted for legal advice and is provide for information purposes only. Baillieu Holst does not give taxation advice or legal advice


Who cares about the Deficits and Debt?Going for Re-election through Growth: Innovation and Transformation

• 2014: Forecast Deficit 2016/17 $6.6b “…the Budget we announce tonight is the first word and not the last word on Budget repair. There is much work that still needs to be done.”

• 2015: Forecast Deficit 2016/17 $23.4b. Surplus in 2019/20“So today we have taken steps to continue repairing the Budget with sensible savings and a prudent approach to spending.“

• 2016: Forecast Deficit 2016/17 $37.1b. Surplus? Please spell that “This is not a time to be splashing money around or increasing the tax burden on our economy or hardworking Australians and their families…Tonight we announce a ten year tax enterprise tax plan to support jobs and growth”


Who cares about the Deficits and Debt?Going for Re-election through Growth: Innovation and Transformation• Budget Deficits expected to be reduced principally through increased

personal tax

• Australians facing some of the highest personal and company income tax rates globally

• Tax reform unlikely this decade. Tax White Paper junked before seeing light of day.

• Spending and Tax mix leading to big problems in 2020s

• Seeming reliance on future good luck and Asia growth

• Productivity, Workforce Participation and Industry flexibility issues not a real focus


Major Financial Projections

13/14 14/15 15/16e 16/17f 17/18p 18/19p 19/20p

Payments -% Growth -% of GDP

+11.825.7

+2.1 25.9

+3.1 25.5

+4.725.8

+3.325.5

+4.725.4

+4.425.2

Receipts -% Growth -% of GDP

+3.523.0

+4.7 23.5

+2.323.5

+6.023.9

+6.324.2

+7.424.8

+6.625.1

Cash Balance (Underlying) - $ billion -% of GDP

-48.5-3.1

-39.9-2.5

-39.4-2.4

-37.1-2.2

-26.1-1.4

-15.4-0.8

-6.0-0.3

Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1


Major Financial Projections


2015 Budget 2006/07 2015/16 2016/17 2017/18 2018/19Net Financial Worth $b -383.5 -406.0 -415.2 -417.8Net FW % GDP -23.2 -23.2 -22.6 -21.6


Risks Continue to be of Higher Deficits



Risks Continue to be of Higher Deficits and Debt


2015/16 Budget

2016/17 Budget


Main Revenue ItemsCash Basis, $b and % change

13/14 14/15 15/16e 16/17p 17/18p 18/19p 19/20p

Individuals

Employment/Earnings Growth %Individual Tax as % of Total

163.6+4.7%

0.7/2.548.3%

177.9+8.7%

1.6/2.350.3%

188.4+5.9%

2/2.2551.7%

197.0+4.5%

1.75/2.551.4%

210.4+6.8%

1.75/2.7551.3%

223.9+6.4%

1.25/3.2551.0%

239.77.1%

1.5/3.551.2%

Companies, FBT, RRTs 72.9+0.3%

72.4-1%

70.0-3.3%

74.5+6.4%

82.1+10.1%

90.2+9.8%

96.5+7.0%

Superannuation 6.1 +19.8%

5.9 -3.7%

6.6 +12.9%

7.4+11.3%

9.0+21.4%

10.0+11.1

10.99.0%

Excises and Customs 35.3+3.5%

34.6-2.1%

34.8+0.6%

35.8+2.8%

37.1+3.7%

39.7+7.1%

42.7+7.4%

Goods and Services Taxes 51.4+3.2%

54.5+6.0%

57.8+6.0%

60.95.4%

64.25.4%

67.65.3%

70.74.5%

All Taxes 338.4 353.5 364.5 382.8 410.2 438.8 468.3

Personal Income Tax Bracket Creep and Increased Profits? main source of Revenue Growth



Might Give some pointers to Future Action



Main Expense Items: Most continue to growAccrual Basis, $b

14/15 15/16f 16/17p 17/18p 18/19p 19/20p

General Public Services & Public Order and Safety 29.7 28.9 27.6 26.6 27.1 28.2

Defence24.6 26.0 27.2 27.9 29.4 31.5

Education31.2 32.5 33.7 33.8 34.5 35.8

Health67.0 69.2 71.4 73.4 76.2 79.3

Social Security and Welfare149.1 152.8 158.6 166.5 184.3 191.8

General Revenue Assistance to State and Local Governments 57.5 58.2 61.3 64.5 67.9 70.9

Public Debt Interest 14.5 15.4 16.6 17.6 18.3 18.7

Other 46.7 48.5 54.2 54.5 51.6 55.4

Total420.3 431.5 450.6 464.8 489.3 511.6



Main Expense Items by Program:Increasing concentration with reducing flexibility Accrual Basis , $b and % of Total Spending

14/15e 15/16e 16/17f 17/18p 18/19 19/20p

Assistance to the Aged 57.6 60.0 63.3 65.7 69.4 72.9

13.7% 13.9% 14.0% 14.1% 14.2% 14.2

Assistance to Families with Children 38.8 38.9 37.6 37.3 39.9 41.6

9.2% 8.9% 8.3% 8.0% 8.2% 8.1%

Medical Services and Pharmaceutical Benefits 28.2 31.5 32.8 33.7 35.0 36.8

6.7% 7.3% 7.3% 7.2% 7.2% 7.2%

Assistance to those with Disabilities 27.7 29.1 33.4 40.5 51.1 52.9

6.6% 6.7% 7.4% 8.7% 10.5% 10.3

Assistance to the States for Public Hospitals 15.5 17.2 17.9 18.9 20.0 21.1

3.7% 4.0% 4.0% 4.1% 4.1% 4.1%

Total of Above as % of Total Spending 39.9% 41.0% 41.1% 42.2% 44.0% 44.0%



Policy Decisions Added to the Deficit, Again



Economic and Financial Background: Low Growth, Slower Productivity gains, Private Sector deflation

Output Growth, Inflation Adjusted, % pa Cons Price Inflation %

pa

Interest Rates % pa 29 April 2016

Structural Central Govt

Budget% of GDP

1997 - 2006 2014 2015E 2016F 2017F 2017F 3 mo

Interbank10 year

Govt Bonds

2017F

United States 3.3 +2.4 +2.4 +2.4 +2.5 +1.5 0.64 1.82 -3.4

Japan 0.9 0.0 +0.5 +0.5 -0.1 +1.2 -0.02 -0.12 -3.5

Euro Area 2.3 +0.9 +1.6 +1.5 +1.6 +1.1 -0.22 0.27(Germany) -0.9

United Kingdom 3.1 +2.9 +2.2 +1.9 +2.2 +1.9 0.59 1.60 -2.2

China 9.4 +7.3 +6.9 +6.5 +6.2 +2.0 3.3 2.90 -2.6

India 6.6 +7.2 +7.3 +7.5 +7.5 +5.3 7.27 7.44 -6.6

Indonesia 2.5 +5.0 +4.8 +4.9 +5.3 +4.5 6.55 7.72 -2.8

ASEAN 5 na +4.6 +4.7 +4.8 +5.1 +3.8 na na na

Brazil 2.7 +0.1 -3.8 -3.8 0.0 +6.5 14.25 12.74 -7.0

Russia 5.0 +0.6 -3.7 -1.8 +0.8 +6.5 11.72 8.88 -3.0

Australia 3.6 +2.6 +2.5 +2.5 +2.5 +2.4 2.5 2.52 -0.9

World +3.4 +3.1 +3.2 +3.5

Group of 7, 1.7

New & Emerging, 5.9

Source: IMF World Economic Outlook, April 2016; www.tradingeconomics.com


Budget Forecasts→Economic growth slow with falling Mining Investment just being offset by increased housing

investment, exports, →Govt growth forecasts revised down from December 2015 MYEFO

→Mining investment falling faster than expected→Non Mining Investment not growing as fast as expected →Private dwelling investment growth to slow more sharply→Public Final Demand growth is lifting with Infrastructure spending

% change, inflation adjusted(Italicised are BH forecasts)

13/14 14/15 15/16e 16/17f 17/18f

Household Consumption 2.5 2.7 3.0 3.0 3.0

New Motor Vehicle Sales, m* 1.12 1.2 1.35 1.40 1.43

Private Investment - Dwellings 5.1 7.9 8 2 1

No. of Private Dwellings Started (‘000)* 178 200 215 220 222

Business Investment – Mining

Business Investment – Non Mining

-7.0

-3.7

-17.3

1.2

-27.5

-2

-25.5

3.5

-14

4.5

Private Final Demand 0.9 1 0.5 1.5 2.5

Public Final Demand 1.6 0 2.25 2.25 2.0


*BH forecasts


Consumer Confidence Poor, Business Rising


Influence of Commodity Prices on Profits

Source: ABS National Accounts cat. 5206.0 De Qtr 2015, 2 March 2016


Non Mining Investment Expectations not Offsetting Lower Mining Investment: Most Output Growth is in Services, historically showing less capital spending

Gross Investment by Major Industry Sector, $b, Current $

10/11 11/12 12/13 13/14 14/15 15/16 4th Est

16/171st Est

Mining 46.9 82.0 94.7 90.4 76.1 56.8 32.8

Manufacturing 12.3 13.2 9.5 9.2 8.6 8.3 7.4

Electricity, Gas & Water 6.2 5.4 5.5 5.8 5.1 5.4 6.6

Construction 5.4 4.7 5.0 4.7 6.3 3.4 2.3

Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.1 8.9 9.2

Transport, Post & Warehousing 11.6 13.7 11.1 11.2 12.5 9.9 10.6

Rental, Hiring & Real Estate 11.9 10.5 9.8 9.6 12.2 11.4 10.0

Other 17.6 17.9 17.7 19.0 20.8 19.9 19.2

Total 119.3 154.8 160.5 158.0 150.7 124.0 98.1

Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure December Quarter, Australia, February 2016


Budget Forecasts→Employment and Wage Growth slow, with forecast falling Household savings ratio to support

moderate retail spending growth→Labour force participation lower for 19 – 65 year old males, rising for baby boomers→Population and Working age population growth slower than earlier estimated, issues longer term

→Employment growth, housing demand, retail spending, tax etc→Inflation staying lower for longer, Private Sector deflation as part of global phenomenon→Private sector and public sector wages growth slowing

13/14 14/15 15/16e 16/17f 17/18f

Employment, % change to June qtr 0.7 1.6 2 1.75 1.75

Wage Price Index, % change to June qtr 2.6 2.3 2.25 2.5 2.75

Unemployment Rate, % June qtr 5.9 6.1 5.75 5.5 5.5

Labour Force Participation Rate, % June qtr 64.6 64.8 65 65 65

Household Savings Ratio, % June qtr, trend 10 9 8 7 7

Consumer Prices, % change to June qtr 3.0 1.5 1.25 2 2.25



Net Worth continues to improve, Households starting to save less

Source: Reserve Bank of Australia Chart Pack April 2016


Budget Forecasts

% change, inflation adjusted 13/14 14/15 15/16e 16/17f 17/18f

Exports 5.8 6.5 6 5 5.5

Imports -1.9 0 0 2.5 3

-Net Contribution to Growth, % GDP 1.6 1.4 1.25 0.75 0.75

Gross Domestic Product 2.5 2.2 2.5 2.5 3

Nominal GDP 4 1.6 2.5 4.25 5

Terms of Trade, % change -3.7 -10.3 -8.75 1.25 0

Current Account Deficit

-$billion

-% of GDP

48.7

3.1

59.6

3.7

78.4

4.75

68.8

4

63.2

3.5


→Export volume growth revised down, Import volume growth revised up→Current Account Deficit revised to be bigger→Overall economic growth rate revised down


Reserve Bank Forecasts

→6 May 2016 Monetary Policy Statement likely to:→Reduce inflation outlook to below 2-3% policy range→Reduce overall economic growth rate to 2-3% pa→Economic growth below potential but that is now lower with slower population growth

Source: RBA Statement on Monetary Policy Feb 2016


(De)flation Outlook frightening policy makers



Wages Growth Slowing Further, Poor Productivity Outcomes


→Issues for:→Household real income growth, particularly with ongoing tax bracket creep→Company revenue growth and profitability→Interest rate outlook


Markets Expecting another Cash Rate Cut to 1.5%→RBA wording of Press release 3 May on Cash rate cut to 1.75% indicates another cut is likely

→Surprise at lower than expected inflation outcomes→Stronger $A than desired for transition of the economy→Economy not growing as strongly as expected


Term Deposit Rates likely lower for less than 12 month, higher for longer terms

→Term Deposit rates spreads over wholesale are contracting as banks now have less need to increase overall retail funding.

→But should be an increasingly positive yield curve:→New banking rules mean most banks may have to increase longer term TDs.→Under 12 months rates likely to be at or under the cash rate in late 2016.

Source: RBA Chart Pack April 2016


Source: Reserve Bank of Australia Chart Pack, April 2016

Forward Price/Earnings Ratios Up since May 2014Driven by very low interest ratesEarnings per share growth looking weak

Australia Late 80s NowDividend Yields 4 - 5% 4.3%

Inflation 7% – 8% 1.5% – 2.5%10 Year Govt Bonds 12% – 13% 2.3% - 3%


$A about right on current commodity pricesShort term dip on changed interest rate expectationsRisk to upside as global commodity supply pulls back


Impacts on:• Living standards while working• Tax needed to support the non-

employed• Business profitability

• Capital Investment• Employment• Share portfolio returns

• Public sector size• Superannuation fund size and returns• The $A• Australia’s position in the region• Defence capacity

Issue remains whether Productivity can lift: Or are Living Standard and Budget Expectations in for a Shock?

2016 Federal Budget Policy Changes


2016 Federal Budget – Overview→ A plan for an election, rather than an annual budget.→ Aim is at lower middle income hard working Australians → “Jobs and Growth” are the core mantra:

→ Focus on innovation, investment and infrastructure to boost the transition of the economy from dependence on mining investment.

→ Ten Year Enterprise Tax Plan→ To promote new investment, new jobs, higher real wages and tax cuts

for smaller enterprises.→ Defence spending rising to unprecedented levels→ A review of the taxation system

→ Limiting the concessions for superannuation→ Tax “relief” by limiting middle income tax bracket creep→ Crack-down on avoidant behaviour by multinationals.


2016 Federal Budget – Business

→ All businesses to see company tax rate of 27.5 per cent by 2024 and 25 per cent by 2027.

→ Unincorporated small businesses with a turnover less than $5 million get a tax discount of 8 per cent.

→ 27.5% for business turnover of under $10m in 2016/17→ 27.5% for business turnover of under $100m by 2020

→ Businesses with a turnover up to $10 million receive $20,000 instant asset write off, expiring in June 2017.

→ Multinational corporations will face a diverted profits tax or "Google tax" of 40 per cent on income they attempt to shift offshore.

→ 1000 member taskforce in the ATO.→ Banks to pay $121 million to fund corporate regulator ASIC

under user pays model.


2016 Federal Budget – Tax

→ Personal Income Tax Threshold rise from $80,001 to $87,000→ Tax cut of up to $6 per week→ To keep 500,000 taxpayers in the middle tax bracket for longer

→ Budget Repair Levy ends as scheduled in June 2017 for income over $180,000

→ Four 12.5% increases in the tobacco excise→ Copied from Labor and what Tony Abbott attacked as a "workers' tax".

→ GST extended to low value goods imported from 1 July 2017.

Current thresholds Rates New thresholds Rates

$0 - $18,200 0% $0 - $18,200 0%

$18,201 - $37,000 19% $18,201 - $37,000 19%

$37,001 - 80,000 32.5% $37,001 - 87,000 32.5%

$80,001 - $180,000 37% $87,001 - $180,000 37%

$180,000+ 45% $180,000+ 45%


2016 Federal Budget – Infrastructure

→ Federal Government Infrastructure spend $50bn including:→ $6.7bn Bruce Highway upgrade.→ $2bn on National Water Infrastructure Loan Facility.→ Inland rail project between Brisbane and Melbourne $594 million.→ $29.5 billion for the National Broadband Network→ Victoria gets 10 per cent of national infrastructure funding averaged over

four years including $1.5bn allocated to Monash Freeway, M80 Ring Road and Murray Basin Freight RailMelbourne.

→ Sydney Metro rail project receives $1.7 billion from asset recycling fund.→ Second Sydney airport at Badgerys Creek receives $115 million.

→ Asset recycling plan expected to unlock $23bn of assets with $3.3bn additional funding provided by Federal Government.

→ A $5bn Northern Australia Infrastructure Facility


2016 Federal Budget – Defence & Security→ Defence building projects receive $195 billion over 10 years

including submarine, frigate, AWD & patrol vessel construction.→$1.6 billion to 2025-26 to fund:

→ a Next Generation Technologies Fund to invest in strategic technologies of $730 million;

→ a Defence Innovation Hub to encourage collaboration on innovation ($640 million); and

→ a Centre for Defence Industry Capability to help build the capacity of Australian industry to support Defence ($230 million).

→ Cyber security gets $230m to enhance cyber research. → Defence force gets $351 million for one year's maintenance of

the fight against Islamic State.→ Australian Federal Police and Australian Crime Commission

funding boosted by $153 million for security amid terrorism fears.


2016 Federal Budget – Education & Health→ Schools get $1.2 billion in extra funding over three years from

2018 - less than Labor's proposed $4.5 billion.→ Universities will still be hit with a 20 per cent funding cut,

originally proposed as part of scrapped fee deregulation package.

→ Disabled students receive $118 million in funding for extra support.

→ State and territory hospitals receive $2.9 billion in additional funding between 2017 and 2020.

→ Aged care providers to lose more than $1 billion in funding for complex healthcare over four years.

→ Doctors: Medicare benefits schedule frozen for three years.


2016 Federal Budget – Welfare & Training

→ $840 million Youth Employment Package over four years→ Young unemployed offered training and internship program

→ Rewards for the employers, under $750 million employment package.→ Welfare budget cuts invested in a new NDIS savings fund.→ Tighter assessments of work capacity of 90,000 disability

support recipients→ Family tax benefit payments tightened, as Government persists

with savings held up in the Senate.→ Parents will wait until 2018, one year later than scheduled, to receive

childcare subsidies funded by FTB changes.→ Some Work for the Dole recipients will see payments restricted.→ New welfare recipients will not receive Carbon tax

compensation payments.


2016 Federal Budget – Major Changes to Superannuation→ $1.6 million superannuation transfer balance cap to Pensions

→ Limit of benefits able to earn a tax free income in pension phase. OK if earnings then take pension benefit over the cap

→ Excess amounts must be transferred out by 1 July 2017→ Excess amounts can be kept in accumulation phase and taxed

accordingly→ $500k lifetime non-concessional contribution cap

→ Effective 7:30pm 3 May 2016. NCC since 1/7/07 count towards this cap but excess not subject to excess tax

→ Effectively abolishes bring-forward provision→ What does this mean for Small Business concessions & injury payments?

→ Concessional cap cut from $30k to $25k from 1 July 2017→ Catchup provision for unused concessional contributions→ For rolling five year period subject to balance being under $500,000→ Only applicable on accruals post 1 July 2017


2016 Federal Budget – Major Changes to Superannuation

→ TRIS changes:→ Lose exempt current pension income status deduction from 1 July 2017→ Lose ability to treat payment as lump sum, not pension

→ Removal of anti-detriment deduction from 1 July 2017→ Division 293 tax threshold reduced from $300k to $250k→ Contributions allowed up to 75th birthday without work test→ Removal of 10% income test for concessional contributions→ Low Income Superannuation Tax Offset to replace Low Income

Superannuation Contribution→ May be potentially more difficult administratively if personal tax return

not lodged prior to fund return→ Increased threshold for accessing spouse contribution rebate

from $10,800 to $37,000.


2016 Federal Budget – Major Changes to Superannuation

→ Not sure the changes do the above→ Certainly will increase uncertainty about whether to use superannuation → Will increase complexity and administration costs

→ Who will have done the necessary record keeping?→ Likely will work to relative advantage of SMSF

→ Antidetriment issue→ Increase number of superannuation benefits


Implications of the Budget for Business and Households • Budget Deficits, Rising Debt and Increasing Interest costs– For the foreseeable future, and likely beyond

• Australian Economy in transition from Mining investment– Export volumes and Services led growth– Hope of Investment in Innovation, despite uncompetitive tax structures

• Inflation and interest rates staying low well into 2018 – Overseas economies growing slower than prior to GFC– Commodity and energy oversupply– Overseas interest rates being kept very low – fears of deflation remain – Slow output growth and difficulties of transition in Australia

– Wages growth very slow and slowing further– Household spending being helped by easing savings ratio– Lack of Productivity growth a rising concern but not discussed– Another cash rate cut is very likely


Implications of the Budget for Business and Households

• Tax changes welcome but:– Too little and too late in global context and Australian needs– Overall strategy will have to wait until after Federal election– Antagonistic Political situation suggests a long wait

• Superannuation changes not well thought out– Appears to have been no consultation– Will create more complexity and uncertainty– Strategies are already being thought through but legislation is needed

• Change of Government could put it all back into the melting pot • Now waiting for the Election