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Federal budget: time for a steady but firm hand

Australian key commodity export prices have fallen towards 2009 lows in the past few months, the Australian dollar has eased, economic growth has softened and the shutdown phase in mining has arrived.

This spells an expanding deficit to federal and state budgets, as resource-related revenue starts to decline. Interestingly, our government spending has risen to essentially offset most of the additional revenue from the mining boom. As our terms of trade continue to normalise, the government is likely to consider new revenue-raising activities, perhaps by broadening the income tax base or improving tax capture with corporates.

This preludes to the upcoming budget, where our declining terms of trade are likely to show a decline in revenue. Last year, the incoming Coalition Government delivered a budget which looked to reduce spending and raise revenues through increased taxation. The proposed measures were met with some opposition and many have not been implemented as policy.

This year, the political debate will likely focus on upcoming fiscal challenges and the associated spending changes. We know from a pre-released statement that this upcoming budget will be mildly contractionary. From a stock point of view, companies that remain heavily dependent on the government for revenue may come under pressure. On the other hand, the mining services and construction sector may stand to benefit from a proposed boost in infrastructure spending.

Despite the decline in exports, job creation remains strong, with job advertisements, hiring intention surveys and employment levels all improving. Although wage growth remains low, the fall in oil prices has seen reduced borrowing and fuel costs, and subsequently a rise in disposable income. We see some of this windfall being spent in discretionary sectors such as leisure, travel and gaming. Confidence is a key ingredient for domestic demand and as consumer sentiment improves, so too does business confidence and market conditions. While we need to acknowledge that our situation has changed and we need to address it, there are still encouraging signs of a mild rebalance.

See the AMP Capital Federal Budget page to register for updates as our coverage of the 2015-16 Federal Budget goes live from 12:01am on Wednesday, 13 May 2015.

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