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ASX shares that could gain from next month’s federal budget

The upcoming federal budget could give a share price boost to a number of ASX-listed stocks as the Turnbull government focuses on handing out sweeteners ahead of next year’s elections.

One sector that is slated to benefit is retail as the government is widely expected to deliver tax relief to middle and lower income families.

This isn’t the only group that could come out winners from May’s federal budget, but I’ll cover this other sector later in the article.

The tax cut could prove to be a material tailwind for retailers that have been buffeted by poor wage growth, a softening housing market and record high household debt as history has shown that poorer households tend to spend their tax windfall, while the rich saves theirs.

But the windfall may not be as large or come as quickly as the sector would like as the Australian Financial Review reported that any tax relief will be staggered over a 10-year period starting with a relatively modest cut.

The tax cut is designed to deliver the biggest windfall to the Turnbull government who wants to look fiscally responsible and to give voters a reason to keep them in power over the longer-term to receive the tax relief.

Nonetheless, a tax reduction will be stimulatory to the Australian economy and to retailers but don’t think that it’s only retailers like Reject Shop Ltd (ASX: TRS), Kmart owner Wesfarmers Ltd (ASX: WES) and Lovisa Holdings Ltd (ASX: LOV) who target the less well-off that will benefit, even though the federal government is focusing on taxpayers earning $87,000 or less.

The scrapping of the 0.5% increase to the Medicare Levy to fund the National Disability Insurance Scheme (NDIS) will also help taxpayers feel richer (even though it doesn’t technically put money into their pockets).

The surcharge is only imposed on individuals earning $90,000 and over or households with a combined income of $180,000 or over.

The irony is that the better off may get a bigger windfall than lower income households in FY19 depending on the size of the tax cut in the first year (this has not been announced and will probably only be released on budget night).

From this perspective, retailers that appeal to both middle and high-income households like fashion and stationery group Premier Investments Limited (ASX: PMV), electronics and small appliance chain JB Hi-Fi Limited (ASX: JBH) and even embattled department store Myer Holdings Ltd (ASX: MYR) could enjoy a bigger tailwind than budget retailers who primarily target low income consumers.

The other sector that stands to reap a big windfall from the budget is engineering and construction. The federal government is looking to keep spending big on infrastructure.

This will no doubt leave shareholders in Downer EDI Limited (ASX: DOW), Cimic Group Ltd (ASX: CIM) and Lendlease Group (ASX: LLC) smiling.

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Motley Fool contributor Brendon Lau owns shares of The Reject Shop Limited. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited and Wesfarmers Limited. The Motley Fool Australia has recommended The Reject Shop Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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