Treasurer Chalmers delivered the Government’s third Federal Budget on 14 May 2024. Reflecting elevated commodity prices and a resilient economy, the budget banked an additional $11 billion (since last December) to deliver Australia’s second consecutive surplus for the current 2023-24 fiscal year (0.3% of GDP). Thereafter, larger deficits take centre stage, averaging 1.0% across the out-years, worsened by an additional $24 billion of new spending, largely front-loaded over the next two years (with real spending growth a punchy 4% per year). While much of this reflects championed cost-of-living relief (as well as higher defence, climate policy, and Australia’s response to the US’s industrial policy), there’s little doubt this will challenge the Reserve Bank of Australia’s (RBA) task of lowering inflation. Indeed, the new stimulus adds to the stimulus already embedded in the Stage 3 tax cuts, as well as almost $20 billion of new spending in last year’s budget. On some measures, this could add up to almost 2% to GDP growth from the start of the new financial year. No doubt, the ‘relief’ measures have the potential to directly lower inflation by 0.5%, as the Government claims. But these consumer savings will surely end up elsewhere in the economy, complicating the RBA’s task.
Despite the deterioration in the budget outlook, deficits of around 1% compare favourably to offshore, especially the US, where the deficit is almost 6% of GDP (and more than 3% in Europe). Australia’s response to the geo-political and geo-economic developments through higher defence and renewable spending is important. Yet, this spending is relatively modest (less than one third of the new outlays) and arguably should also be funded out of the Government’s multi-decade high revenue intake. The question is more about the extent of the lost opportunity, and whether with Australia’s buoyant terms of trade (commodity prices), and at a time when the RBA is trying to lower inflation, there should be a greater focus on repairing the budget position and reducing government debt (lowering future generations’ interest burdens and improving fiscal flexibility). Time will tell the extent to which the structural position of the budget has deteriorated, as well as the extent this stimulatory budget delays long-awaited interest rate relief.
In this Special report, we provide an overview of the budget’s key take-away messages from the perspective of investors. We also provide a summary of key policy changes from a wealth planning perspective, and what the most recent budget announcement likely means for markets.
Australia’s response to the geo-political and geo-economic developments through higher defence and renewable spending is important. However, this spending is relatively modest and arguably should also be funded out of the Government’s multi-decade high revenue intake.
Despite the Government’s declarations, the 2024-25 budget is more reactionary than visionary. Significant new funding continues to be directed toward cost-of-living relief, the aged, and healthcare, as Labor attempts to appease voters ahead of an election that must be held by May 2025. Geo-political tensions and the geo-economic gauntlet, laid down by the USD 1 trillion Inflation Reduction Act (IRA), have also compelled new spending in the form of further defence increases and the Future Made in Australia initiative. While greater efficiencies out of the National Disability Insurance Scheme (NDIS) fund a significant share of new spending, the net impact remains a stimulus of over 0.3% of output next year. While moderate in comparison to global peers, these new spending initiatives are not likely to make the task of lowering inflation any easier.
The undesirable macro backdrop has increased political pressure on the Government to provide further cost-of-living relief for the Australian electorate.
Strong nominal economic growth, decades-low unemployment, and a near century-high terms of trade have continued to buoy the near-term fiscal position, lifting the forecast $1.1 billion deficit last December to an expected surplus of $9.3 billion (0.3% of output). However, despite the positive fiscal backdrop, it has been clear for some time that the macro-economic environment has been deteriorating. Per-capita economic activity has been declining for over a year; immigration-driven population growth has propped up aggregate economic growth but also put increasing pressure on social infrastructure and housing; and inflation remains stubbornly above the RBA’s target band.
This undesirable macro backdrop has increased political pressure on the Government to provide further cost-of-living relief for the Australian electorate, even as the Government sets out its response to the IRA through the Future Made in Australia initiative, and while spending on the NDIS, defence, aged care and health continue to drive structural deficits.
There is an additional $24.3 billion of new spending over the next four years, with $19.8 billion front-loaded into the next two years. New spending of about $9.5 billion in financial year 2025—about 0.3% of output—represents moderate near-term fiscal stimulus. It will raise the question of whether the Government has struck the right balance between relieving cost-of-living pressures, helping the RBA in its fight to bring inflation down, and embracing meaningful structural reforms to repair the longer-term fiscal outlook.
There are two key themes behind this year’s budget that highlight its reactionary nature. Firstly, cost-of-living relief to address domestic electoral pressures; secondly, enlarged state-directed spending on national resilience.
There are two key themes behind this year’s budget that highlight its reactionary nature. Firstly, cost-of-living relief to address domestic electoral pressures; and secondly, enlarged state-directed spending on national resilience to address geo-economic competition from the US’ IRA.
Another year of resilient economic activity, healthy labour markets, and commodity price strength have continued to shield the budget over the near term.
Another year of resilient economic activity, healthy labour markets, and commodity price strength have continued to shield the budget over the near term, but Australia’s good fortune in this regard will not last forever, and it is disappointing that the Government has not leveraged this economic windfall to pursue more meaningful structural reforms to improve Australia’s longer-term prospects.
The Government forecasts gross debt on issue to rise from $904 billion (33.7% of output) in 2023-24 to a record high $1,112 billion (34.9% of output) in 2027-28, before drifting down to 30.2% by 2034-35. Net debt increases from a lower 18.6% in 2023-24 to peak in 2027-28 at 21.9%.
The Australian dollar was little changed post-budget. Australia’s S&P AAA credit rating is also unlikely to be affected by the 2024-25 budget, given Australia’s strong fiscal position compared to other developed economies, where much larger fiscal deficits persist post the pandemic stimulus.
A large portion of the detail had been pre-released. Consequently, the impact on equity markets was largely already priced.
As is typical with past budgets, a large portion of the detail had been pre-released. Consequently, the impact on equity markets was largely already priced. The final budget outcome of a AUD 9.3 billion surplus is an easing in fiscal policy versus the 2022-23 budget. However, this is not enough to materially alter the equity implications, as viewed through the budget’s impact on the aggregate economy, inflation, or monetary policy (although forecast budget deficits over the next four years are much larger than predicted six months ago). Overall, however, last night’s budget is a small positive for the equity market, with several measures providing a “bridge” to eventual rate cuts that will offset some of the weakness associate with higher interest rates and a slower pace of migration.
In fact, when it comes to budget night, an important distinction needs to be highlighted - the stock market is not the economy. According to the Australian Bureau of Statistics, organisations with fewer than 20 employees make up 44% of the workforce, contribute 48% of profits, and represent 34% of economic output. As such, when it comes to the budget and its focus, we can often overplay the equity market impact at a stock and a sector level. There are no ASX-listed companies with less than 20 employees. Furthermore, the stock market derives only 55-60% of its revenue directly from Australia, with the rest repatriated from offshore sources (i.e., not exposed to the Australian economy or the federal budget).
Arguably, the bigger implications are what the budget does to interest rate or currency expectations. And to this end, there has been no discernible move in market pricing over the past several weeks. This is also reflected in returns data over the past decade. The average return for the S&P/ASX 200 index on the day after the federal budget is just 0.28% (eight times higher and twice as low). The average return for the month following is 0.22% (50/50). What is different this time is that the S&P/ASX 200 was lower in the month prior to the budget, bucking the historical norm, where it is typically 2% higher. At a sector level, healthcare typically performs strongly in the month following the federal budget. Similarly, the IT sector performs strongly, although it is unlikely that this is budget-related, given the nature of the index’s IT sector. The materials sector shows the weakest post-budget performance, posting a negative one-month performance eight out of the past 10 budgets.
The Government has opted for ‘modest’ cost-of-living support. The consumer discretionary sector will be the ‘canary in the coal mine’ for how stimulatory the market views this budget.
Nonetheless, one of the pillars of our ‘bridge-to-rate-cuts’ thesis for the domestic equity market has been that the implementation of the Stage 3 tax cuts (around $20 billion of income tax cut relief) and pre-election cost-of-living relief would support the domestic economy (and equity market) until such time as greater visibility on rate relief occurred. Some of the initiatives announced in relation to this include:
The Government continues to have a policy goal of boosting housing supply, with an ambitious target of 1.2 million houses to be built over the next five years.
Retail: In an attempt to strike a balance between voter-friendly fiscal stimulus and not provoking an upward bias to interest rates, the Government has opted for ‘modest’ cost-of-living support. Although the Government outlined numerous cost-of-living measures, all are modest when viewed in light of the 1 July Stage 3 tax cuts. Small businesses (with less than $10 million in turnover) will gain access to a $20,000 instant asset write-off, encouraging private sector capex. At the margin, this is supportive for small business spending. Arguably, the consumer discretionary sector will be the ‘canary in the coal mine’ for how stimulatory the market views this budget. If stocks trade well, this suggests that an appropriate balance has been struck, or at least that the ‘bridge’ remains intact. A weak showing in retail bellwethers would suggest that the stimulatory impact of the budget will garner a tightening bias/response from the RBA before end-2024.
Housing: The Government continues to have a policy goal of boosting housing supply, with an ambitious target of 1.2 million houses to be built over the next five years (financial years 2025-29). Building approvals and completions remain near decade-low levels and would require a 50% uplift immediately to achieve the run-rate required to match the Government's target. The Government has earmarked more than $90 million to boost the number of skilled workers in the construction and housing sectors through fee-free TAFE places and fast-tracked visa applications. The moves are aimed at helping close the national skills gap and increase the supply of homes. $1 billion will be injected into the National Housing Infrastructure Facility, and there will be a further $1 billion for the states towards infrastructure needed for the construction of homes. This can be used for roads, sewers, energy, water, and other community infrastructure.
Education: The Federal Government will introduce legislation to cap the number of students that can be enrolled by each of the 1,400 universities, allowing for providers to go over those caps if they can prove they have invested in new student accommodation. It is also believed an increase in visa fees is likely, with the existing fee of $704 expected to rise to $1,500. This would make Australian visas the most expensive among competitor countries.
Healthcare: The budget includes $8.5 billion in health spending, including $227 million for 29 additional urgent care clinics. As part of the wider cost-of-living package, co-payments for prescriptions on the Pharmaceutical Benefits Scheme will be frozen at $7.70 for pensioners and concession card holders and $31.60 for the general public.
Energy: More than $330 million will go towards a variety of companies (listed and unlisted) to fund decarbonisation projects, from the already announced Powering the Regions Fund.
Infrastructure: Growth areas in Western Sydney will receive $1.9 billion in infrastructure funding, including key freight and traffic routes to the new Western Sydney Airport. Victoria will receive an extra $3.25 billion for the North East Link, which is being built between Melbourne’s Eastern Freeway and the M80 Ring Road. The huge project is expected to open in 2028.
The energy transition: The Government has earmarked $19.7 billion by way of loans, investments and other incentives. $7 billion will be directed to new tax incentives for critical minerals, $8 billion for green hydrogen, and $1.5 billion to help fund the Australian Renewable Energy Agency. The creation of a domestic solar industry is also planned, with $523 million towards the Battery Breakthrough Initiative and $835 million Solar Sunshot Program. There is also $1.2 billion for various critical minerals projects. There will be a 10% production tax credit totalling $7 billion over the next decade for all 31 critical minerals to drive processing (not mining) In conjunction with Green Hydrogen funding, this cost is split between $7.1 billion from now until FY 2034 and then a further $10.6 billion until FY 2041. The credits will only kick in from FY 2027 and are only eligible for ‘processing and refining costs’, such as the downstream refining operations of IGO’s Greenbushes project and Wesfarmers Mt Holland operation (next year). On the Green hydrogen front, the Government will gift a $2 subsidy per kg of renewable hydrogen produced between FY 2027 and 2041, for up to 10 years per project.
The long-awaited Stage three income tax cuts will come into effect from 1 July 2024, with those earning more than $200,000 per annum to receive annual tax cut of $4,529 versus financial year 2023-24.
The long-awaited Stage three income tax cuts will come into effect from 1 July 2024, with those earning more than $200,000 per annum to receive an annual tax cut of $4,529 compared to financial year 2023-24. The biggest beneficiaries of the new tax rates will be low to middle-income earners, with the 19% tax bracket falling to 16%.
The Government will extend the instant asset write-off threshold by another year to 30 June 2025 for small businesses with aggregated annual turnover of up to $10 million. Small businesses will be eligible to immediately deduct the full cost of eligible assets costing less than $20,000 when first installed or ready to use. Importantly, this measure is based on a per-asset basis, so businesses can instantly write off multiple assets.
The Government will extend the Australian Taxation Office (ATO) Personal Income Tax Compliance Program for one year from 1 July 2027. This will enable the ATO to continue its focus on emerging risks to the tax system, such as deductions relating to short-term rental properties. In addition, the Government will extend the ATO Tax Avoidance Taskforce for two years from 1 July 2026. This will ensure the ATO is well resourced on key tax avoidance areas, such as multi-nationals, large public and private companies, and high-wealth individuals.
The Government will strengthen the foreign resident capital gains tax (CGT) regime to ensure foreign residents pay an appropriate share of tax in Australia and to provide greater certainty about the operation of the rules. The amendments will apply to CGT events commencing on or after 1 July 2025 to:
The new ATO notification process will improve oversight and compliance with the foreign resident CGT withholding rules, where a vendor self-assesses their sale is not taxable real property.
The Government is providing $1.1 billion over four years from financial year 2024–25 and $0.6 billion per year from financial year 2028–29 to pay superannuation on government-funded paid parental leave (PPL) for births or adoptions on or after 1 July 2025. Paying an annual superannuation payment of 12% on the full partnered entitlement of 22 weeks will increase a median earning mother’s superannuation balance at retirement by around $4,250 or 1.15%.
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