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Australia Politics May 2018

Australia: Budget set to deliver modest tax relief ahead of next year’s elections

The ruling Liberal-National coalition presented its budget for fiscal year 2018/2019 on 8 May. The highlight of the budget, which otherwise lacks bold measures, is a cut in income tax rates for low- and middle-income earners that will take effect on 1 July. Notably, the government envisages achieving a slight budget surplus next fiscal year despite the tax cuts. A tax revenue windfall over the past year has allowed the government to keep a fiscally responsible stance. Although the tax relief is limited in scope, it could drive up retail sales, which were anemic in the first quarter due to subdued wage growth and a weakening housing market, in the second half of this year.

The budget projects a surplus in 2019/2020, on the back of higher revenue growth. Achieving a budget surplus would be a new phenomenon for the Australian Treasury, following years of deficits. If achieved, it would reinforce Australia’s public finances, which are already solid. The budget also contains a planned pick-up in government investment spending, which should translate into some stimulus. In addition, the plan reaffirms the government’s commitment to cutting the corporate tax rate from the current 30%—one of the highest rates among OECD countries—to 25% within ten years. However, this measure is unlikely to be approved since the Senate rejected a similar proposal in the recent past. The budget will now have to be approved by both legislative houses, but since the center-right coalition does not have an absolute majority in the Senate, the final version could be modified.

Australia’s economy entered the 27th consecutive year of expansion in 2018, but growth has lost some steam recently as a mining investment boom has come to an end. The latest budget could provide some short-term fuel to the economy and improve the current government’s prospects in next year’s elections, although polls released just after the presentation of the budget did not reveal significant changes in voting intentions.

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