Hey Big Spenderrrr(s) - Australian Budget & RBA Preview

Let's start with the RBA.

The consensus is that a final rate cut is coming (from 0.25% to 0.1%).

Everyone seems to agree that it will be a matter of when rather than if. 

Westpac are looking for;RBA to cut the overnight cash rate to 0.1%Three year target bond rate to 0.1%Term Funding Facility rate to 0.1%Exchange Settlement balances to 0.01%.

Originally they called for this to happen at the October meeting, but have since pushed this back to November.

NAB

It really wouldn't make sense for the RBA to announce monetary policy changes a few hours before the budget is announced.

Therefore, the RBA meeting should take a back seat to the federal budget announcement due a few hours later (09:30BST).

The Budget 

This budget will definitely be on the expansionary side.

Exactly how expansionary, and where that spending will be targeted is what the market is paying attention to.

Westpac say;

(Download their detailed preview here)

The NAB preview can be found here

Market expectations (AFR)

New tax measures

Income tax cuts The government is expected to backdate to July 1, 2020, the "stage two" tax cuts that were due to start in July 2022, and fast-track the “stage three“ cuts due to start in 2024. That means the income threshold for the 32.5 per cent tax rate rises to $120,000 (from $90,000) and under stage three, the 37 per cent tax rate is replaced with 30 per cent for everyone earning between $45,000 and $200,000. Income over $200,000 would be taxed at 45 per cent. Tax relief for low income earners is also likely.

Investment allowance The government has already indicated an investment allowance will be included in Tuesday's budget. Big business wants a 20 per cent write-off with no limit on the size of companies that can claim the concession.

Tax loss 'carry back' benefits This allows small businesses to offset current losses against previously paid taxes to boost cash flow.

R&D tax breaks The government may reverse all or some of the $1.8 billion in proposed cuts to the research and development tax break.

Small business start-up tax breaks The budget will spend $105 million on 10 tax breaks for operators with turnover between $10 million and $50 million. They include no FBT on car parking, phones or laptops, simpler trading stock rules and easier PAYG instalments.

Fringe benefit tax break for training Retraining or reskilling workers who face redundancy will be exempt from FBT.

Income tax deduction for retraining The government will consult on changes to existing rules that deny people from claiming tax deductions for the cost of training for a future career.

New spending measures

Apprentice subsidies Employers will gain $1.2 billion in subsidies for the wages of 100,000 new apprentices for a year.

Expanded first home buyer scheme An extra 10,000 first home buyers will be able to obtain a loan to build or buy a newly built home with a deposit of as little as 5 per cent.

The government will also increase the caps on the price of such homes that can be purchased to as much as $950,000 from $750,000, to reflect the higher prices for new properties compared to existing.

Manufacturing grants Grants of $1.5 billion to promote advanced manufacturing in six areas: resources and critical minerals; food and beverages; medical products; recycling and clean energy; defence and space.

State infrastructure payments The states will gain billions in use-it-or-lose-it infrastructure payments designed to encourage them to spend by providing more for those who get the money out the door the quickest.

Aged care More funding for home-care packages for older people as an alternative to nursing homes.

Women A 2020 Women's Economic Security Statement to help women reach financial independence, reduce the gender pay gap and get more women into the workforce.

Economic indicators

Debt Gross debt to approach $1 trillion, deficit to exceed $200 billion.

Migration The budget will confirm more people will leave the country than arrive over the next two years, with net migration levels to fall into negative territory for the first time since the end of World War II.

Unemployment The jobless rate is expected to peak below 10 per cent.

It would be a pretty epic failure if the government disappoints the markets.

They have a 'covid-pass' and shouldn't be afraid to use it.

The message needs to be loud and clear.

As long as the budget meets or surpasses expectations, and the overall risk tone remains positive, the AUD would be expected to react positively to the budget announcement.