The details of the 2014 Budget have been covered through various media and there is no value to be added by going line-by-line through each initiative. Almost everybody has already calculated which initiatives will impact them and when. Instead, we feel there is greater value looking at what the budget is likely to do to economic growth prospects, interest rates, the Australian dollar and company profits in general.

Our assessment is that economic growth over the next year or so will be a little weaker than would otherwise have been the case, but with better prospects for stronger economic growth medium-to-longer term. This will be assisted by interest rates holding low for longer and a greater likelihood of the Australian dollar depreciating over the coming financial year. A timing disconnect between the imminent sharp rundown in mining investment spending and the delay before the major part of the ramp up in government infrastructure spending kicks in, is also likely to accentuate the difference between sub-trend economic growth persisting through much of 2014-15 and a sharp acceleration to above trend growth beyond. One undoubted benefit from the Budget is that what small risk there was that Australia might at some stage face sovereign debt issues – akin to those that faced the United States and Europe in the wake of the global financial crisis – requiring a run of truly austere budgets has been all but removed. The Budget has entrenched Australia’s undoubted AAA sovereign debt rating.

In broad terms, the cutting part of Budget 2014 mostly impacts the household sector, but only some of the cuts impact in the near-term. The earliest is the debt levy on high income earners starting July 1st 2014. Other changes, such as the Medicare co-payment, do not start until July 1st 2015 while indexation arrangements for age pensions do not change to the CPI from wages until 2017. In totality, the impact of the various budget announcements on net government spending in the economy, i.e. government spending contribution to economic growth, is best viewed by how Treasury’s forecast of the Government’s underlying budget position has changed relative to its latest pre-budget assessment; the Mid-Year Economic and Financial Outlook (MYEFO) presented back in December 2013.

In the MYEFO, Treasury forecast an underlying budget deficit for the coming financial year (2014-15) of -$33.9 billion, or -2.1% of GDP whereas in the Budget last night their new forecast is -$29.8 billion, or -1.8% of GDP. The difference between the two is around 0.3 percentage points of GDP representing roughly what the Budget cuts will detract from GDP growth. In the absence of the Budget’s changes, economic growth seemed on track to make a near long-term trend 3.0% in 2014-15. With the Budget changes, that pulls back to 2.7% (Treasury forecasts 2.75%).

Going a year further out to 2015-16, MYEFO forecasts a deficit of -$24.1 billion, or -1.4% of GDP, whereas the Budget forecasts -$17.1 billion, or -1.0%. The drag from the budget on prospective growth is 0.4 percentage points, a little greater than in 2014-15, which makes sense given the staggered introduction of the various measures. The drag is also 0.4 percentage points going a year further out to 2016-17.

Even with the headwind to growth from the Budget over the next few years, Treasury forecasts GDP growth accelerating to 3.0% in 2015-16 and 3.5% in 2016-17. While these forecasts of accelerating growth seem incongruous at first glance, what needs to be kept in mind is that other growth-friendly forces are likely to be in play more than offsetting the negative impact of the Budget cuts. Among these forces, the worst of the headwind to growth from falling mining investment spending is likely to be in 2014-15 before diminishing considerably in 2015-16. The export volume bonanza from the mining investment boom is likely to be increasing through the forecast years, noticeably so from late 2015 as the big LNG facilities start exporting. Government, road, rail and airport construction work will be ramping up considerably after 2015. Importantly, the near-term softness in growth through 2014-15 will likely extend the period that the RBA can leave the cash rate at a very accommodating 2.50%. It is more likely in the wake of the Budget that the cash rate will be unchanged extending into 2015. As a result, it is more likely that the Australian dollar will be weaker than would otherwise be the case.

All told, the Budget is relatively friendly for Australian equity investors. Businesses are not being asked to contribute to reduce budget deficits in the way that households are. Instead there is a small reduction in company tax rate for some, reconfirmation that the government will attempt to remove the carbon tax and promise of less government regulation and more stream-lined government processes affecting businesses. Interest rates look like staying low for longer and there is further reason to expect a softer Australian dollar. Some businesses may be preferred relative to others, notably those that are advantaged by greater government infrastructure spending and those that can leverage off the major boost to medical research over the next few years. On the other side of the ledger, retailers may find 2014-15 a bit tougher as a result of the budget, in line with households who really are being asked to do most of the heavy lifting to future-proof Australia’s budget and government debt positions.