The document provides an overview and analysis of the 2015 Australian Federal Budget. Key points include: - The budget forecasts continued economic growth but issues around commodity prices, exchange rates, and business investment. - The Coalition has abandoned austerity measures and is focusing on stimulating jobs and growth through small business tax cuts, infrastructure funding, and middle class welfare spending. - Proposed changes to the age pension asset test will require many retirees to draw down on their capital. - The budget forecasts a gradual reduction in the underlying cash deficit over the coming years but risks remain of higher deficits.

1. Darryl Gobbett
Economist, Adviser & Commentator
Federal Budget Update
19 May 2015
Intercontinental Hotel
Adelaide
SA

2. Disclaimer
o Any advice contained in this presentation is general advice based on the investment merits of the
security or issuer alone without taking into account any person’s investment objectives, financial
situation and particular needs.
o The information contained within this presentation was compiled by Darryl Gobbett and he provides
no warranty regarding the accuracy or completeness of the information. All opinions, conclusions,
forecasts or recommendations are reasonably held at the time of compilation but are subject to change
without notice by Darryl Gobbett who assumes no obligation to update this presentation after it has
been presented. Except for any liability which by law cannot be excluded, Darryl Gobbett disclaims all
liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the
information contained in this document or any loss or damage suffered by the recipient or any other
person directly or indirectly through relying upon the information.
o Before making any investment or other decision based on such advice, the recipient must decide
whether it is appropriate to his/her needs or seek specific professional advice.

3. The 2015/16 Federal Budget Background:
o 2015/16 likely to continue Australia’s recession free growth since 1991
– Issue of how the domestic economic and industrial structural change progresses
– Sharp drop in commodity prices
– $A still higher than policy makers want
– Households still big savers and wages growth slowing
– Business non-mining investment not lifting as fast as hoped
o Global economy looking better than expected
– Spending, Output and Profits higher than 2007 peaks
– Most major and developing economies growing
– Public Sector deficits shrinking faster than expected – Australia is an exception
– Capital markets recovery continues, perhaps too exuberantly
– Rising view that 2014 Deflation fears were overdone
– Cash Interest rates to stay very low but Bond yields now rising

4. The Coalition has given up on Austerity
o The End of the End of the Sense of Entitlement
– Neither the Electorate or the Parliament see any need for sacrifice
o Focus is on getting re-elected
– Win back the “lifters” without pushing further away the “leaners”
o Stimulate Confidence and Jobs growth in the Coalition heartlands
– Small business tax cuts and concessions
– Funding for Infrastructure, Farmers and Northern Australia
– Get more tax from big business
o “Repair” the political damage on Child Care, Parental leave and Retirees
– Add to Middle Class welfare and clipping the higher earners
– Tighten Age Pension qualifications via Asset Test

5. The Coalition has given up on Spending Austerity
o Last year:
“…the Budget we announce tonight is the first word and not the last word on Budget repair. There is much work
that still needs to be done.”
o This year:
“So today we have taken steps to continue repairing the Budget with sensible savings and a prudent approach
to spending. We are directing funding to areas such as small business, child care and infrastructure, which will
boost growth and create jobs.”
o Budget Deficits expected to be reduced principally through increased personal tax
– Personal Income Tax rising as % of Total revenue and GDP. Spending steady as % of GDP.
– Australians facing some of highest income tax rates globally
– Tax reform unlikely this decade. Tax White Paper due in 2015?
– Spending and Tax mix leading to big problems in 2020s
o Seeming reliance on future good luck and Asia growth
o Productivity, Workforce Participation and Industry flexibility issues not a real focus
o Continued risk of becoming the white trash of Asia

6. Proposals for Small Businesses
o From 1 July 2015
• Tax rate cut by 1.5% to 28.5% for Small companies with annual turnover less than $2m
– Franking credit rate remains at 30%
• 5% tax discount of up to $1,000 for unincorporated small businesses. Provided as tax credit with tax return
• Immediate deductibility of professional expenses associated with starting up the business
• CGT rollover relief when changing legal structures from 2016/17 income year.
• FBT exemption for all work-related portable electronic devices, ie for multiple devices per employee
• More flexibility for wage subsidy payments
– Up to $6,500pa, plus Funding for work experience for 6,000 young job seekers on income support over 4years
– Restart subsidy up to $10,000 to employ workers over age 50 on income support for 6 months or more
• Reverse 2014/15 Budget measure Stronger Participation incentives for Job seekers under 30
– From 1 July 2016 new job seekers under 25 years will get the new RapidConnect Plus
– To undertake additional job search activities within the first 4 weeks before getting income support.

7. Proposals for Small Businesses
o From 1 July 2015
– Expanded tax concessions for Employee Share Schemes: Taxing point and discounts
– Aim to remove impediments to Crowdsourced equity funding: related to costs of becoming public co.
– Streamlined Business Regulation model (from mid 2016)
o From 12 May 2015 to 30 June 2017
• Small businesses can claim an immediate tax deduction for each and every item purchased up to the value
of $20,000 (currently $1,000).
• Suspend “ lock out” laws for the simplified depreciation regime un til 30 June 2017
• Assets over $20,000
– Can be pooled and depreciated at 15% in first income year and 30% in second income year
– When pool value under $20,000, can be immediately deducted

8. Proposals for Other Businesses and tax-payers
o No change to 30% company tax
o Multinational Anti-Avoidance Law from 1 January 2016
– “…when Australian customers deal with an Australian subsidiary or local entity that is integral to the customer’s decision to
enter into the contract, those Australian sales will be recognised as Australian income. Therefore tax will be paid on
economic activities undertaken in Australia.”
– Stop multinationals using complex schemes to not pay company tax
– To pay double what is owed, plus penalty interest
– Implement laws and practices “…consistent with directions of G20 and OECD dialogue.” to stop multinational tax avoidance.
o Foreign businesses supplying digital products and services to be subject to GST
– Including e-books, music, movies and consulting advice
o Fees for all foreign investment applications from 1 January 2015, including residential
o Accelerated depreciation for primary producer spending on fences, fodder storage assets and water facilities
o FBT exemptions in health and not-for-profit sectors for “meal entertainment” capped at grossed up $5,000
– Includes holidays, cruises, weddings and meals and alcohol in restaurants
– Standard FBT exemption caps remain for employees of PBI ($31,177) and public and NFP hospitals and ambulance services
($17,667)

9. Proposals for Other Businesses and tax-payers
o Full cost recovery of superannuation activities by increasing supervisory levies paid by financial institutions.
o Relax criteria for release of superannuation for terminal medical conditions
o Reverse to 7 years period after which unclaimed money in saving accounts and life insurance policies transferred to
the government
o Streamline arrangements for reclaiming lost and unclaimed superannuation admin administration
o Managed Investment Trusts transition date for new tax system to apply from 1 July 2016
o “Modernising Offshore Banking Unit regime including 10% tax rate from 1 July 2015
o Introduce $100m cap on eligible R&D spending tax offsets at 43.5%/38.5%. Excess can be offset at company tax rate.
o Global Infrastructure Hub to be income tax exempt to 30 June 2019
o Zone Tax Offset no longer available for Fly-in Fly-out workers
o Higher Education Loan Repayments to be based on worldwide income from 1 January 2016
o Extend Tasmanian Freight Equalisation Scheme including $700 subsidy for 20 ft EU containers
o Simplify, ie reduce, work-related car expense deductions to one rate of 66c per km. Log book method to be retained.
o Australian Aged Care Quality Agency Accreditation Services full cost recovery

10. o Developing Northern Australia
– Northern cattle supply chains: road infrastructure, logistics, deregulation, investment
– Northern infrastructure projects pipeline
– Northern Australia Infrastructure Concessional Loan Facility of up to $5b.
• Applications from 1 July 2015
• Interest payments expected from 2021/22
– Northern Australia Insurance Premiums Taskforce regarding cyclone specific cover
– Regional aviation services subsidies and airstrip upgrades
Proposals for Other Businesses and tax-payers

11. Families
o Child Care from 1 July 2017
– Replace Childcare Benefit, Child Care Rebate and Jobs, Education & Training Child Care Fee Assistance
Programme
– Families earning $65,000 pa (ATI) or less will get a subsidy of 85% up to an hourly cap per child
• $11.55 for Long Day care; $10.70 for Family Day Care; $10.10 for Outside School Hours Care
– Subsidy tapers to 50% to family earnings of $185,000 (ATI) with $10,000 annual cap per child
• Income Thresholds indexed to CPI
– Parents need to meet employment, training, study or income support participation tests per fortnight that align
with subsidised hours
• 8-16 hours for up to 36 hrs subsidised; 17-48 hrs for up to 72 hrs subsidised; 49 or more hrs for up to 100 hrs subsidised
– Children need to attend approved child care service and meet immunisation standards
– Subsidy will be paid directly to child care provider
– “Nannies” trial starting 1 Jan 2016 for subsidy to eligible families on incomes below $250,000 (ATI)
• Subsidy at a % of $7 ph based on Child Care Subsidy parameters
• Nannies to be attached to approved service, be at least 18 years of age, have current Working with Children Check and
meet first aid requirements

12. Families
o Child Care from 1 July 2017
– Parents with employment parental leave entitlements will only get a “top up” from Federal Government
– Extra assistance for vulnerable children:
• Child Care Safety Net, Additional Child Care Subsidy, Community Child Care Fund, Inclusion Support
Programme
– Families experiencing temporary financial hardship
– Low income families with at least one parent not currently undertaking recognised activity to access
24 hours of subsidised care per fortnight
– Disadvantaged communities
– Children with additional needs
o Family Tax Benefit Part A
– Changing Eligibility criteria
– Reduce overseas portability to 6 weeks in 12 month period while families are overseas
o Increase Medicare Low–income thresholds in line with CPI from 2014/15 income year

13. o No Jab No Pay (FTB A or subsidised childcare) from 1 July 2016
o Microfinance projects (continuation) for low income and vulnerable Australians
– Including no and low interest loans
– Leverage funding from corporate partners
Families

14. Retirees and Age Pensioners
o Asset Test changes from 1 January 2017 (Home remains outside of Asset Test)
o Raised Lower Threshold for start of Full Pension so more get a full Age Pension:
– For Homeowning Couples, from $286,500 to $375,000
– For Homeowning Singles, from $202,000 to $289,500
– For Non Homeowning Couples from $433,000 to $699,000
– For Non Homeowning Singles from $348,000 to $537,000
o Increased taper rate to $3 pf of Pension lost for each additional $1,000 of assessable assets
over lower threshold
o Lowered Top Threshold for eligibility for part pension:
– For Homeowning Couples, from $1,151,500 to $823,000
– For Homeowning Singles, from $775,500 to $547,000
– For Non Homeowning Couples from $1,298,000 to $1,023,000
– For Non Homeowning Singles from $922,000 to $747,000

15. Retirees and Age Pensioners
o No changes to Assessable Assets for Deeming or to Income Test
o Income Test
– Thresholds for Single of $4,160 pa and Couple combined of $7,384 pa
– Then 50c pension reduction per Additional $
– Payments cease at income of $48,890 pa for singles and $73,100 for Couples
o Deeming Rates
– 2% up to $48,000 for Singles and $79,000 for Couples and 3.5% on increments
– Govt previously proposed reducing lower threshold to $30,000 for Singles and $50,000 for Couples
o Proposed Asset Test top Thresholds will have Deemed Income of:
– $18,425 for Homeowner Singles
– $27,620 for Homeowner Couples
o Proposed Asset Test arrangements very much in favour of:
– Non or low assessable income streams
– Work income
– Defined Benefit Pensions

16. Retirees and Age Pensioners
o Level of Defined Benefit Superannuation pensions that can be excluded from the Age Pension income test
will be capped at 10% from 1 January 2016
– Excludes DVA pensions and defined benefit income streams paid by military superannuation funds
o Reduction from 26 weeks to 6 weeks absence from Australia that Age and some other Pensions will be paid at
a reduced rate
– Payment will be proportional to their period of Australian Working Life Residence if under 35 years
– AWLR is period of permanent Australian residency between age 16 and Age Pension age
o Not proceeding with 2014/15 Budget measures Reset the Income Test Rate Thresholds
o Not proceeding with 2014/15 Budget measure on indexing Pensions to CPI
– Continue to be higher of CPI or Pensioner and Beneficiary Living Cost Indexed and benchmarked against
Male Total Average Weekly Earnings

17. o Government quite explicit that Asset Test changes will require many Retirees to draw on capital
– Explanatory tables indicate how much to match Age Pension loss
o Some new issues facing many Retirees (and their super managers)
– Try to increase portfolio returns
– Plan for capital drawings
– Increase liquid assets for certainty of drawings
– Stay at work longer or go back to work (hinted at in the Budget)
– Spend faster to get below thresh
– Will need to be discussions on each
o Current Commonwealth Seniors Health Card holders will continue to get the concessions
– No indication of new changes to Income Test or applying an Asset Test
Retirees and Age Pensioners

18. Major Financial Projections
12/13 13/14 14/15f 15/16f 16/17f 17/18p 18/19p
Payments
-% Growth
-% of GDP
-1.0
25.9
+11.8
25.7
+2.1 (+0.4)
25.9 (24.8)
+3.6 (+2.8)
25.5 (24.7)
+3.5 (+4.6)
25.5 (24.8)
+4.4 (+5.2)
25.3 (24.8)
+5.8
25.3
Receipts
-% Growth
-% of GDP
+6.2
23.1
+3.5
23.0
+4.7 (+6.1)
23.5 (23.6)
+5.5 (+6.4)
24.0 (24.0)
+6.2 (+6.4)
24.2 (24.4)
+7.4 (+7.1)
24.7 (24.9)
+7.6
25.2
Cash Balance
(Underlying)
- $ billion
-% of GDP
-18.8
-1.2
-48.5
-3.1
-41.1 (-29.8)
-2.6
-35.1 (-17.1)
-2.1
-25.8 (-10.6)
-1.5
-14.4 (-2.8)
-0.8
-6.9
-0.4
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

19. Financial Net Worth forecasts
Source: Australian Government 2015/16 Budget Paper No. 1

20. Risks Continue to be of Higher Deficits
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

21. Risks Continue to be of Higher Deficits and Debt
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

22. Main Revenue Items
Cash Basis, $b and % change
12/13 13/14 14/15e 15/16e 16/17p 17/18p 18/19p
Individuals
Employment/Earnings Growth
156.3
+5.7%
1.2%/2.9%
163.6
+4.7%
0.7%/2.5%
176.6
+7.9%
1.5%/2.5%
189.6
+7.4%
1.5/2.5%
203.1
+7.1%
2%/2%
217.6
+7.1%
234.8
+7.9%
Companies, FBT, RRTs 72.7
-0.3%
72.9
+0.3%
74.2
+1.9%
74.5
+0.4%
80.3
+7.8%
86.5
+7.7%
92.8
+7.3%
Superannuation 7.7
+1.6%
6.1
+19.8%
6.1
+0.7%
9.1
+47.9%
10.5
+16.0
11.2
+6.5
11.8
+4.9
Excises and Customs 33.6
+3.2%
35.3
+3.5%
33.8
-4.3%
34.3
+1.5%
35.7
+4.1%
37.0
+3.6%
38.8
+5.0
Goods and Services Taxes 49.8
+5.8%
51.4
+3.2%
54.3
+5.6%
57.3
+5.6%
61.2
6.9%
64.8
5.8%
68.5
5.7%
All Taxes 326.4 338.4 351.5 370.1 396.4 422.8 452.5
Bracket and Super Creep
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

23. Reducing the Deficit Relies on a non-Sustainable
Personal Tax Situation

24. Individuals Tax Contribution
12/13 13/14 14/15e 15/16e 16/17p 17/18p 18/19p
Individuals
% change pa
Employment and
Earnings Growth
Individuals tax as % of
Total Commonwealth
Revenue
Individual Tax Growth as
% of change in Total
Revenue
$156.3b
+5.7%
+4.1%
44.5%
38%
$163.6b
+4.7%
+3.2%
45.4%
79%
$176.6b
+7.9%
+4.0%
46.8%
77%
$189.6b
+7.4%
+4.0%
47.6%
63%
$203.1b
+7.1%
+4.0%
48.1%
55%
$217.6b
+7.1%
+4.0%
48.0%
47%
$234.8b
+7.9%
+4.0%
48.1%
50%
Source: Australian Government 2015/16 Budget Strategy and Outlook Budget Paper No. 1

25. Company Tax Rates and Take also High
Source:OECD.org /ctp/tax-policy/revenue-statistics-tables
Company Tax
as % of GDP

26. Main Expense Items: Most continue to grow
Accrual Basis , $b
13/14 14/15f 15/16f 16/17p 17/18p 18/19p
General Public Services & Public
Order and Safety 38.0 29.7 27.0 27.8 27.0 27.3
Defence 22.1 24.6 26.3 26.1 27.6 28.8
Education 29.7 31.2 31.9 33.1 34.1 35.1
Health 64.0 67.0 69.4 71.6 74.1 77.0
Social Security and Welfare 140.6 149.1 154.0 159.7 170.7 186.9
General Revenue Assistance to
State and Local Governments 53.6 57.5 60.0 63.9 67.5 71.2
Public Debt Interest 13.4 14.5 15.6 16.5 16.8 17.4
Other 52.4 46.7 50.3 54.0 54.0 55.7
Total 413.8 420.3 434.5 452.7 471.8 499.4
Source: Australian Government 2015/16 Budget Paper No. 1

27. Main Expense Items by Program:
Increasing concentration with reducing flexibility
Accrual Basis , $b and % of Total Spending
14/15e 15/16f 16/17f 17/18p 18/19
Assistance to the Aged 57.6 60.7 63.1 65.5 69.4
13.7% 14.0% 13.9% 13.9% 13.9%
Assistance to Families with Children 38.8 38.1 37.1 38.2 39.9
9.2% 8.8% 8.2% 8.1% 8.0%
Medical Services and Benefits 28.2 29.5 30.7 31.8 33.6
6.7% 6.8% 6.8% 6.7% 6.7%
Assistance to those with Disabilities 27.7 29.5 34.2 43.0 53.1
6.6% 6.8% 7.6% 9.1% 10.6%
Assistance to the States for Public
Hospitals 15.5 16.4 17.4 18.1 18.8
3.7% 3.8% 3.8% 3.8% 3.8%
Total of Above as % of Total Spending 39.9% 40.1% 40.4% 41.7% 43.0%
Source: Australian Government 2015/16 Budget Paper No. 1

28. Policy Decisions Added to the Deficit
Source: Australian Government 2015/16 Budget Paper No. 1

29. Global Growth Uneven, Moderate but Continuing
Source: IMF World Economic Outlook, April 2015
Over 75c+ of each $1 of global growth is now from Emerging Economies
Output Growth, Inflation Adjusted, % pa
2009 2010 2011 2012 2013 2014 2015F 2016F
United States -2.6 +2.4 +1.8 +2.8 +2.2 +2.4 +3.1 +3.1
Japan -6.3 +4.5 -0.8 +1.4 +1.6 -0.1 +1.0 +1.2
Euro Area -4.1 +2.0 +1.4 -0.7 -0.5 +0.9 +1.5 +1.6
China +9.2 +10.4 +9.2 +7.7 +7.8 +7.4 +6.8 +6.3
India +6.8 +10.1 +6.8 +3.2 +6.9 +7.2 +7.5 +7.5
Indonesia +5.7 +6.2 +6.5 +6.2 +5.3 +5.0 +5.2 +5.5
ASEAN 5 +1.7 +7.0 +4.5 +5.4 +5.2 +4.6 +5.2 +5.3
Brazil -0.6 +7.5 +2.7 +1.0 +2.7 +0.1 -1.0 +1.0
World Output -0.5 +5.1 +3.8 +3.1 +3.4 +3.4 +3.5 +3.8
Inflation: Advanced
Emerging
+0.1
+5.2
+1.5
+6.1
+2.7
+7.2
+2.0
+6.1
+1.4
+5.9
+1.4
+5.1
+0.4
+5.5
+1.4
+4.8
$US 6month LIBOR 1.1% 0.5% 0.5% 0.7% 0.4% +0.3% +0.7% +1.9

30. US Growth on Sustainable footings
Household consumption, Housing, Business Investment, Exports

31. * Birinyi and Associates, Wall Street Journal Market Data Centre, 15/5/2015
US Corporates continue to increase Profits and
Cash Holdings but at Slower pace
 US Company Profits near Record Levels (Q4 2014)
on National Accounts Basis.
 Expect further rises into 2016
 Low Interest rates, Cheap Energy
 Productivity growing, Wages growth slow
 US consumer outlook improving
 For S&P500 companies, Forward Price to Earnings
Ratio now 17.9* vs 16.4 trailing ave (since 1954)
so getting stretched. Div yield 1.98%.
 “Cash” held by US Non-Financial Corporates
 Dec 2014: $US1,669.7 billion
 Up 6% yoy
 M&A activity up sharply to $US902b in Q1 2015.
Highest since 2007 (Dealogic)

32. Further Growth Forecast in Earnings per Share into 2016
Source: Yardeni Research Inc, 15 May 2015

33. Budget Deficits Down and To Fall Further
Credit ratings and Capital markets access improving

34. Source: European Commission European Economic Forecast Winter 2014 (5/2/2015)
Forecasts for European Union Countries
2013 2014e 2015f 2016f
Real GDP Growth, % 0.0 1.3 1.7 2.1
Real Private Consumption Growth, % -0.1 1.3 1.9 1.8
Real Gross Fixed Capital Formation Growth, % -1.5 2.2 3.0 4.6
Employment Growth, % -0.4 0.9 0.7 0.9
Unemployment Rate, % 10.8 10.2 9.8 9.3
Household Inflation, % 1.5 0.6 0.2 1.4
General Government Net Borrowing (-), % of GDP -3.2 -3.0 -2.6 -1.9
Labour Productivity Growth, % 0.4 0.4 0.9 1.2
Compensation per Employee, Growth, % 1.7 1.6 1.6 1.9
Euribor interest rate, 3 months % pa 0.2 0.2 0.0 0.0
Long Term Government Bond Yields, % pa 2.9 2.3 0.5 0.7
Fears of Deflation and Recession in Europe keeping
Interest Rates very low

35. Overseas Monetary Policies Remain Very Stimulatory
o Aim of most Central banks is to Increase Inflation to 2%
o Cash Rates:
– Financial Repression: Force savers to spend
– European Central Bank and Bank of Japan using Quantitative Easing
– Cash and Bond Rates at record low levels
• Official Cash*: ECB -0.2%; Japan 0.1% Bank of England 0.5%, USA 0.25% *
• 10 Year Govt Bonds*: UK 1.89%, Germany 0.63%, France 0.92%, Japan 0.39%,
– Keep retail deposit and loan interest rates very low: USA eg
• Mortgages*: 30 Year fixed 3.92%, variable 3.36%; New car loan 5 years at 2.93%
• *CMA 0.35% (>$50,000), 5 year CD 1.45%, 10 year Bonds 2.136%
o Quantitative Easing
– To continue in Europe and Japan.
– Buying long term public and private debt
– Additional offset to Budget deficit reductions
– Bond rates moving up in anticipation of USA cash rate rise and 2014 overdone fears of European deflation
P 35* Wall Street Journal Market Data Centre, 15/5/2015

36. Bond Rates moving up because fell too far

37. Middle Class Spending, $USb equivalents, 2009 Purchasing Power
2009 2030
North America and Europe 13,740 17,174
Asia Pacific 4,952 32,596
Rest of World 2,586 5,910
Total 21,278 55,680
Source: OECD Development Centre Working Paper No 285,
The Emerging Middle Class in Developing Countries Jan 2010
Growth Driven by Emerging Economies’ Urbanisation &
Middle Class Households

38. Source: China 2030, World Bank and Development Research Centre of the State
Council, the People’s Republic of China, 2012
China: Projected growth

39. Growth is Changing: Issue is How we Adapt
Source: RBA Statement on Monetary Policy, May 2015

40. Source: RBA Bulletin March Quarter 2015
China Growth: More than Iron Ore and Coal

41. China Risks
o Provincial, State Owned Enterprises and City debts and guarantees
– High, but owed to each other. Very low personal mortgage debt.
– Very regionalised SOE, not national as in the USA.
– Low Central Government budget deficits and debt, Very high foreign currency reserves.
– Revamp of income tax system to reduce reliance on property transactions.
– Crack down on corruption, reduced regulation and opening up to competition may reduce excesses.
– New preparedness to let property developers go broke should affect risk appetite.
– Financial markets reforms to allow greater choice for savers.
o Ageing fast: Workforce not growing, Population about to start falling
– End of one Child policy
– Increased Social security spending and changes to residency rules
o Wages costs showing strong growth
– Necessary to boost consumption, reduce savings, limit social unrest
o Pollution and Ecological damage
– Remediation and prevention now a big focus and affecting Industries
o Nationalism and Strategic Over-reach are bigger emerging risks
P 41

42. Iron Ore and Copper past their worst. Coal
faces more Woes

43. Commodity Prices Beginning to Lift more Broadly

44. P 44
$A down more than expected.
But likely to stay higher than RBA or Govt want

45. The Australian Economy: The Federal Government’s Forecasts
% change, inflation adjusted
(Italicised are PSL forecasts)
10/11 11/12 12/13 13/14 14/15f 15/16f 16/17
Household Consumption 3.1 3.2 2.0 2.5 2.5 2.75 3.25
New Motor Vehicle Sales, m* 1.001 1.03 1.14 1.12 1.2 1.35 1.45
Private Investment - Dwellings 3.0 -3.6 -0.1 5.1 6.5 6.5 4.5
No. of Private Dwellings Started (‘000)* 154 141 159 178 200 215 220
Business Investment – Mining
Business Investment – Non Mining
34.9
3.2
74.7
1.7
13.6
-9.7
-7.0
-3.7
-15.5
2.0
-25.5
4.0
-30.5
7.5
Private Final Demand 3 6.2 2.8 0.9 1.25 1.25 2.25
Public Final Demand 3.4 2.3 -1.3 1.6 1.25 1.5 1.5
Source: Australian Government 2015/16 Budget Paper No. 1
* DG Forecasts

46. Consumer & Business Confidence Steady but Middling

47. Influence of Commodity Prices on Profits
Source: ABS Cat 5206, Australian National Accounts Dec Qtr 2014, 4/3/2015

48. Gross Investment by Major Industry Sector, $b, Current $
2010/11 11/12 12/13 13/14 14/15 5th Est (1st
Est)
15/16 1st Est
Mining 46.9 82.0 94.7 90.4 82.4 (74.2) 60.2
Manufacturing 12.3 13.2 9.5 9.2 8.4 (6.3) 6.0
Electricity, Gas & Water 6.2 5.4 5.5 5.8 5.2 (5.0) 4.9
Construction 5.4 4.7 5.0 4.7 4.8 (1.7) 1.8
Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.7 (6.5) 6.9
Transport, Post & Warehousing 11.6 13.7 11.1 11.2 11.5 (8.4) 7.5
Rental, Hiring & Real Estate 11.9 10.5 9.8 9.6 12.3 (9.0) 9.1
Other 17.6 17.9 17.7 19.0 18.4 (13.7) 13.4
Total 119.3 154.8 160.5 158.0 152.7 (124.9)
(*Possible 142)
109.8
Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure December Quarter, Australia, February 2015
* Based on last 5 years’ historical realisation
ratios of Actual Investment to the current
estimate.
Private Investment Expected To Fall
But Likely Less Dire Outlook than 2 years ago

49. The Australian Economy: The Federal Government’s Forecasts
10/11 11/12 12/13 13/14 14/15f 15/16f 16/17f
Employment, % change to June qtr 2.2 0.5 1.2 0.7 1.5 1.5 2.0
Unemployment Rate, % June qtr 4.9 5.25 5.6 5.9 6.25 6.5 6.25
Labour Force Participation Rate, % June qtr 65.5 65 65.1 64.6 64.75 64.75 64.75
Household Savings Ratio, % June qtr, trend
*DG forecast
11.4 11.5 10.5 10 9* 9* 9*
Source: Australian Government 2015/16 Budget Paper No. 1

50. Net Worth has improved again
But Households likely to remain Big Savers
Source: Reserve Bank Chart Pack May 2015

51. Spending and Borrowing likely to stay in line with Income growth
Source: Reserve Bank Chart Pack May 2015

52. The Australian Economy: The Federal Government’s Forecasts
% change, inflation adjusted 10/11 11/12 12/13 13/14 14/15f 15/16f 16/17
Exports 0.2 4.7 6 5.8 6.5 5 6.5
Imports 10.4 11.8 0.5 -1.9 -3 -1.5 2.5
-Net Contribution to
Growth
-2 -1.3 1.2 1.6 2 1.25 1
Gross Domestic Product 2.0 3.4 2.6 2.5 2.5 2.75 3.25
Nominal GDP 8.3 5 2.5 4 1.5 3.25 5.5
Source: Australian Government 2015/16 Budget Paper No. 1

53. The Australian Economy: The Federal Government’s Forecasts
10/11 11/12 12/13 13/14 14/15f 15/16f 16/17f
Consumer Prices, % change to June qtr 3.6 1.2 2.4 3.0 1.75 2.5 2.5
Wage Price Index, % change to June qtr 3.8 3.7 2.9 2.5 2.5 2.5 2.75
Terms of Trade, % change +20.6 +0.4 -9.8 -3.7 -12.25 -8.5 0.75
Current Account Deficit
-$billion
-% of GDP
43.7
3.1
49.3
3.3
59.0
3.9
48.7
3.1
48
3
58
3.5
48
2.75
Source: Australian Government 2015/16 Budget Paper No. 1

54. RBA Forecasts for Inflation and Growth
- $A still higher than earlier expected
- Inflation in the 2-3% range
Source: RBA May 2015 Statement on Monetary Policy

55. Wages Growth Slowing Further,
Poor Productivity Outcomes
Source: Reserve Bank Chart Pack May 2015

56. Domestic Inflation Low,
Overseas factors Dampening Impacts of Lower $A
Source: Reserve Bank Chart Pack May 2015

57. Markets Expecting one more Cash Rate Cut

58. Longer Term Rates at cycle lows. TDs could still go lower.

59. Australian Share Prices & Profits
Australian Profits Still High, Investors remain Cautious

60. Forward Price/Earnings Ratios Up since May 2014,
Driven by very low interest rates
Australia Late 80s Now
Dividend Yields 4 - 5% 4.3%
Inflation 7% – 8% 1.5% – 2.5%
10 Year Govt Bonds 12% – 13% 2.3% - 3%
Source: RBA Chart Pack May 2015

61. Issue remains whether Productivity can lift
Or are Living Standard Expectations in for a Shock?
Source: Australian Government Tax Discussion Paper 2015
Impacts on:
• Living standards while working
• Tax needed to support the non-employed
• Business profitability
• Capital Investment
• Employment
• Share portfolio returns
• Public sector size
• Superannuation fund size and returns
• The $A
• Australia’s position in the region
• Defence capacity

62. Summary
o Budget deficits for foreseeable future with any reductions coming from increased tax
• Declining Budgetary flexibility on both Revenue and Expenses
o Growth staying slow as economy adjusts to lower mining investment
• Housing, Public Infrastructure and Exports remain the main growth areas.
• Slow Employment growth and Unemployment staying relatively high
– Wages growth just above inflation
– Demographics starting to impact labour force growth
– Labour force participation forecast to be static
o Households to continue saving strongly
• Largely spending in line with income growth while rising real individual tax take
• Impacts on Retail Spending, Superannuation Contributions, Debt, and Savings
o Inflation and Cash Interest Rates remaining very low here and overseas
• Absent a shock, Long Bond yields not likely to rise much in 2015/16
• Issues for retirees for superannuation pension drawings, particularly with tougher Asset Test
o Stagnant Productivity growth and High Tax Rates not addressed
• GST Rise and Broadening is coming but not soon
o Age Pension Asset Test changes will require alignment of Income Test
• Trojan horse for concessionally assessed and mandatory income streams