Budget highlights long-term value of China trade

Budget highlights long-term value of China trade

Wed, 09/05/2018 - 12:16

Chinese Premier Li Keqiang with Prime Minister Malcolm Turnbull at Parliament House in Canberra in March 2017. Photo: Reuters/David Gray

Increased spending in Australia’s federal budget has underscored the long-term importance of the country’s trade relationship with China, but the government’s commitment to return to surplus could yet be derailed by global trade tension.

Malcolm Turnbull’s Liberal government unveiled a wide range of infrastructure spending commitments it its annual budget, while at the same time forecasting a return to surplus by 2019-20.

Those commitments included the continuation of the Liberal government’s $75 billion, 10-year infrastructure plan to improve road and rail networks across the country, as well as a $30 billion five-year plan to upgrade hospitals.

More than $2.5 billion will be spent to upgrade public technology infrastructure, $1.6 billion on residential aged care, and $294 million was committed to improving national security.

ShineWing Australia managing partner Danny Armstrong said the country’s strong trade relationship with China had essentially bankrolled a number of the new initiatives.

“Over the past 10 years we have seen a growing interdependency between our economies, and the types of spending initiatives that we have seen are in part made possible because of increased demand and improving prices for Australian commodities from China,” Mr Armstrong said.

“However, the Chinese economy is maturing, and as demand grows for more sophisticated products and services, Australia will have to work hard to maintain its current position.

“This underscores the importance of government investment which encourages innovation, creates better products and services, and delivers world-class infrastructure which drives efficiencies and makes it simpler for Australian companies to compete on the world stage.”

While Mr Armstrong said many Australian and oversees businesses may not readily identify the benefits of the new federal budget, the long-term commitment to investment would improve the performance of the national economy.

“Businesses that want to take advantage of these opportunities need to partner with a trusted advisor who has the capability and networks to help them navigate the complexities of the bilateral relationship,” Mr Armstrong said.

Other initiatives unveiled in the budget included a four-year, $13.4 billion income tax package which would provide immediate tax cuts for low and middle-income households, and a proposal to abolish the highest income tax bracket of 37 per cent by 2024-25.

Capital Economics Australia chief economist Paul Dales said those tax cuts would likely result in the Reserve Bank of Australia keeping interest rates on hold until late next year.

“Overall the treasurer appears to be using a rosy outlook for the economy to justify income tax cuts and an earlier surplus,” Mr Dales said.

“We believe that low wage growth and a weakening housing outlook will mean the economy doesn’t live up to those high hopes.”

Global ratings groups welcomed the return to surplus by 2019-20, coming in at $2.2 billion in that year, despite forecasts predicting a $2.6 billion deficit in the government’s December mid-year review.

The surpluses were predicted to increase to $11 billion in 2020-21 and $16.6 billion in 2021-22.

Ratings agency S&P said in a statement following the budget’s release that strength in the national and global economies as well as fiscal prudence had eased negative pressures on the country’s credit rating.

However, S&P said global trade tensions could 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,” S&P said.

“The outlook on the long-term Australian sovereign ratings remains negative for now to reflect those uncertainties.”