With space now to reflect on the May 8 Federal Budget and its impact on our clients, it is evident the budget was a strategic document a government could take to an election. But there are a lot of assumptions that have to become reality over the next four years to deliver on its promises.

A few key points from the budget include the Federal Government forgoing $140 billion of tax revenue over the next decade, imposing a cap on its take of the nation’s annual earnings to 23.9 per cent and returning the budget to surplus in the 2020 fiscal year, which is 12 months earlier than expected.

The government’s economic outlook is that the strong growth experienced this year will not just continue but strengthen further. And it will propel wages into the limelight and push businesses to deliver long dormant wage rises.

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The government will do its bit by further expanding an already significant nation building infrastructure package, and in the short term a boost will come from low and middle income earners as they start spending up to an additional $530 a year from the initial round of tax cuts that come into effect next financial year.

But Australia is a country that relies heavily on global economic growth to support its strong export base and deliver internal growth, and that is by no means assured.

International ratings agency Standard & Poor’s placed Australia’s AAA credit rating on negative outlook in July 2016, which indicates there is an ongoing one in three chance the rating could be lowered over the next two years. And nothing in the budget has promoted it to shift its stance.

Following the budget release S&P issued a statement that said: “The budgetary position has improved over the past year, aided by strength in the Australian and global economies. The government has also shown a commitment to fiscal prudence with its plan to return a balanced budget earlier than previously announced.

“Nevertheless, risks to the country’s fiscal outlook remain, including increasing external economic uncertainties in recent months. Global trade tensions, coupled with rising investor aversion to emerging markets in recent months, may dampen economic growth among Australia’s key trading partners.

“As such, risks to the government’s plan for an earlier return to budget surpluses are significant. The outlook on the long-term Australian sovereign ratings remains negative for now to reflect these uncertainties.”

And that pretty much aligns with our position at Citi. The Triple A rating looks secure as long as revenue growth remains strong. But while revenue growth has been surprisingly strong this year it could weaken abruptly at some point and place the Government’s forward estimates out of reach.

The budget repair, which includes a surplus of $2.2 billion in the 2020 fiscal year and rising to a $16.6 billion surplus in the 2024 fiscal year relies on continuing favourable economic parameters.

LITTLE TO NO ROOM FOR ERROR

The improved budget position comes largely from $26 billion in additional tax receipts over the four years forward estimates when compared to forecasts from the government’s 2017 mid-year economic forecasts (MYEFO).

Most of this reflects upward revisions to income accruing from a more favourable labour market and the assumption of higher ongoing commodity prices that also feed into a pick-up in other taxes such as the GST.

The risk is that the economy does not provide sustained gains in government receipts over the next four years to justify the optimistic budget forecasts. This would suggest the budget is at risk of doing what many other budgets have done since the GFC, that is, overestimate the strength of the government’s fiscal position

To keep the budget’s plan on track there are two key assumptions that have to play out.

Businesses have to maintain and gain confidence to invest in growth and fuel employment, particularly full-time employment. And constrained budgets within households leading to low consumer spending need to be reversed with broad-based wage increases, leading to increased confidence in consumer spending.

Looking forward from our current position it’s a credible scenario, but the rails could come off the tracks quickly if future assumptions on global growth are disrupted.

Damon Frith is content editor at Citi Australia Wealth Management.

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