In today's economic research note, we break down the headline budget numbers, summarise key policy initiatives and explore their implications for key asset classes.

The 2017/18 Commonwealth Budget has seen the Government reset its Budget and economic narrative, embracing debt to fund infrastructure, using new taxes to fund focussed spending initiatives on jobs, small businesses, health, housing affordability and education, while also addressing the revenue issue evident in recent years. We consider the Budget's economic forecasts to be relatively conservative and achievable.

In today's economic research note, we break down the headline budget numbers, summarise key policy initiatives and explore their implications for key asset classes.

Australian Budget: Resetting the debt narrative

  • The Budget deficit for 2017/18 is estimated at $A29.4bn (1.6% of GDP), down from the 2016/17 deficit – which is now estimated at $A37.6bn, 2.1% of GDP.
  • The return to surplus is now in the projections, in 2020/21, at $A7.4bn, 0.4% of GDP, but will of course rely on the new saving and revenue measures being legislated and economic growth returning to trend.
  • If the focus on infrastructure, jobs, growth and productivity bears fruit, then this should be supportive for the equity market. Over time, the renewed focus on infrastructure investment could lift potential economic growth in Australia, helping support the equity market.
  • The Budget has had a minimal impact on the Australian dollar, with some initial weakness on the release but then recovery after.
  • This Budget should help reduce some of the near-term pressure on the AAA rating, but ratings agencies will continue to warn of the dangers and the need for fiscal consolidation. Our fixed income team provide their views on the impact a Sovereign downgrade could have on various assets here.
  • The Budget impact on financial markets is expected to be limited apart from the banking sector. The implications for monetary policy are minimal and we continue to expect the RBA to remain on hold at 1.5% well into 2018.