26 October 2022
Treasurer Jim Chalmers delivered the Australian Labor Party’s first post-election Federal Budget on 25 October 2022, updating the 2022-23 fiscal outlook. The budget largely ‘banks’ the $43 billion net positive impact of booming commodity revenue receipts (significantly offset by a deteriorating economic outlook) that puts Australia in a strong position relative to other countries in regard to our post-pandemic ‘fiscal recovery’. Still, even with the relatively modest $10 billion of net new spending (over four years), the budget settles into steady deficits between 1.8% and 2.0% of output, with little improvement forecast, highlighting the challenges associated with balancing the budget in the future.
The top-line figuring also masks a significant reprioritising of budget spending away from previously announced infrastructure plans (and other Coalition policies) to fund key election promises around cost-of-living support, including cheaper childcare and pharmaceuticals, as well as additional funding for parental leave, health, aged care, and the National Disability Insurance Scheme (NDIS). Further ahead, significant expenditure is planned for boosting housing affordability and the climate transition. Given the structural nature of new spending, a weaker than forecast economy may present future budget risks.
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.
The budget largely ‘banks’ the net positive impact of booming commodity revenue receipts that puts Australia in a strong position relative to other countries in regard to our post-pandemic ‘fiscal recovery’.
Slowing economy takes a toll on the ability to improve the budget near term
In March, the budget profile showed a moderate halving of the deficit from 3.4% of output in 2022-23 to 1.6% for 2025-26. This was on the back of the temporary nature of many of the prior government’s pandemic stimulus measures and another year of lower-than-expected unemployment and sharply higher iron, coal, and gas prices. As shown in the table on the following page, the revised fiscal outlook reveals a better starting point at around 1.5% of output, but with limited further improvement (and some deterioration to 1.8% in 2024-25). This is largely due to a significantly weaker economic outlook and the impact of higher inflation on welfare payments (as well as new spending).
Indeed, for 2023-24, after growth of 3.25% in 2022-23 (revised lower from 3.5%), the economy is forecast to slow to just 1.5%, compared with the March budget forecast of 2.5%. Increased revenues of $145 billion over the outlook is significantly offset by $92 billion of expenses due to higher inflation and a rising unemployment rate (now expected to rise to 4.5% mid-2024, above the 3.75% forecast in March). The net $43 billion improvement (after $10 billion of new spending) lowers near-term deficits, but Australia’s debt is now forecast to trend higher (mostly due to higher debt interest costs). Positively, the usual practice of conservative forecasting of commodity prices suggests the potential for further upgrades to budget revenues over the coming couple of years.
Budget delivers limited fiscal stimulus…but less infrastructure, more social services
In terms of fiscal stimulus, the impact of the budget’s new policy measures over the next couple of years is close to zero (though it rises to 0.3% in 2024-25). This is consistent with the new government’s stated intention to not complicate the Reserve Bank of Australia’s task of reducing inflation (now forecast to peak at 7.75% in Q4 this year, compared with 4.25% in March), and limit the extent to which interest rates need to rise in the period ahead (with the budget forecasting a cash rate peak of 3.35%).
However, despite only $10 billion of net new spending policies announced, the new government has delivered savings of around $28.5 billion to fund a significant new (re-prioritised) policy agenda.
Despite only $10 billion of net new spending policies announced, the new government has delivered savings of around $28.5 billion to fund a significant new (re-prioritised) agenda.
What are the budget’s key savings policies?
The budget delivers savings of $6.5 billion from re-prioritised infrastructure (including significant rural and regional capex); $3.6 billion from reduced costs associated with consultants, advertising and travel; and $1.7 billion from changes to the national water grid (mostly from cancelling planned future dam projects). There is also an additional $3.7 billion expected from stronger tax compliance and $1 billion from higher tax collections from multi-nationals.
What are the budget’s key spending policies?
The combination of rising interest rates and pandemic-led spending that raised the deficit has seen the Government’s interest servicing bill rise sharply.
A rising debt profile…the crux of the Treasurer’s ‘hard decisions’ ahead (…but not now)
Unfortunately, the combination of rising interest rates and pandemic-led spending that raised the deficit has seen the Government’s interest servicing bill rise sharply. Estimates suggest annual interest expenses could rise to $70 billion by early next decade, around twice that forecast back in March. On a percent of output basis, that’s a rise from around 1.1% to 1.8% by 2032-33.
The Government forecasts gross debt on issue to rise from $895 billion (39.0% of output) in 2021-22 to a record high $1,159 billion (43.1%) in 2025-26—and continues to drift higher to 46.9% by 2032-33. Net debt rises from 22.5% to 28.5% of output, and drifts only modestly higher to 31.9% in 2032-33. The Australian dollar was little changed post the budget. Australia’s S&P AAA credit rating is also unlikely to be affected by the revised budget, given Australia’s relatively strong fiscal position compared to other developed economies.
Cumulative five-year budget figures
: Australian Government, LGT Crestone.
What are the key policy changes from a wealth planning perspective?
Superannuation
The Government will allow more people to make downsizer contributions to their superannuation by reducing the minimum eligibility age from 60 to 55 years of age. The measure will have effect from the start of Q1 2023. The downsizer contribution allows people to make a one-off post-tax contribution to their superannuation of up to $300,000 per person from the proceeds of selling their home. Both members of a couple can contribute, and contributions do not count towards non-concessional contribution caps. This measure provides greater flexibility to contribute to superannuation and aims to encourage older Australians to downsize sooner to a home that better suits their needs, thereby increasing the availability of suitable housing for younger Australian families.
The Government will defer the start date of the 2021–22 budget measure that proposed relaxing residency requirements for self-managed superannuation funds. It will be deferred from 1 July 2022 to the income year commencing on or after the date of Royal Assent of the enabling legislation.
Budget repair and tax integrity:
The Government has stopped the streaming of franked dividends to shareholders resulting from company off-market share buy-backs effective from budget night. Additionally, it will not proceed with the measure to allow taxpayers to self-assess the effective life of intangible depreciating assets, announced in the 2021–22 budget. Reversing this decision will maintain the status quo—effective lives of intangible depreciating assets will continue to be set by statute.
The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency. This maintains the current tax treatment of digital currencies, including the capital gains tax treatment where they are held as an investment. The exclusion does not apply to digital currencies issued by, or under the authority of, a government agency, which continue to be taxed as foreign currency.
The Government has extended and boosted the funding of three key compliance areas:
1. Personal income—It will provide $80.3 million to the Australian Taxation office (ATO) to extend the Personal Income Taxation Compliance Program for two years from 1 July 2023. This extension will enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in key areas of non-compliance, including overclaiming of deductions and incorrect reporting of income.
2. Tax avoidance—It has boosted funding for the ATO Tax Avoidance Taskforce by around $200 million per year over four years from 1 July 2022. The boosting and extension of the Tax Avoidance Taskforce will support the ATO to pursue new priority areas of observed business tax risks, complementing the ongoing focus on multi-national enterprises and large public and private businesses.
3. Shadow economy—It will extend the existing ATO Shadow Economy Program for a further three years from 1 July 2023. The extension of the Shadow Economy Program will enable the ATO to continue a strong and co-ordinated response to target shadow economy activity, protect revenue, and level the playing field for those businesses that are following the rules.
From 1 July 2022, the Government will exempt battery, hydrogen fuel cell and plug-in hybrid electric cars from fringe benefits tax and import tariffs if they have a first retail price below the luxury car tax threshold for fuel-efficient cars. The car must not have been held or used before 1 July 2022.
The Government has stopped the streaming of franked dividends to shareholders resulting from company off-market share buy-backs.
The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency. The Government will introduce legislation to clarify that digital currencies (such as Bitcoin) continue to be excluded from the Australian income tax treatment of foreign currency.
What does it mean for markets?
Prior to last night’s budget, Treasurer Jim Chalmers had already suggested that he was likely to adopt a pragmatic and bond-market sensitive approach, describing the situation in the UK as a ‘cautionary tale’. This was echoed by the finance minister:
“One of the challenges we’ve had putting this budget together is looking at how we can make a difference to some of those cost-of-living pressures without adding to the inflation challenge…One thing we don’t want to be doing is fuelling that or making the work of the Reserve Bank harder.”
The significant rise in funding costs in the UK over the past month has spilled over to other markets. The yield on Australia’s 10-year government bond has increased from 3.66% to 4.08% over the same period, underscoring the importance of credible fiscal policy. Arguably, the transmission mechanism for last night’s budget will be less about the equity market and more about the bond market (although bond yields have a considerable influence over equity markets). To this extent, S&P was quick to comment that last night’s budget “won’t greatly add [to] inflationary pressures.”
Equity market impacts appear muted, and we are reluctant to draw too much sensitivity from last night’s announcements at a sector or stock level. There is likely to be less infrastructure spend (around $8 billion over four years, or approximately 20% from the previous budgeted levels) and more reallocation of spend. For the mining sector, there will be some relief that, unlike other parts of the world which have raised the prospect of introducing various levies on “super profits”, the Labor Government has ruled this out. Additionally, the Government will not remove the Stage 3 income tax cuts for higher-income earners beginning in July 2024.
Home builders looking for greater government support for affordable housing and/or build-to-rent will be heartened, with an agreement between states and territories to free up land, designed to boost private sector investment and supply. The proposal will seek to incentivise superannuation funds and other institutional investors to make investments in social and affordable housing by covering the gap between market rents and subsidised rents. The push for multi-nationals to pay more tax will be viewed, at the margin, as positive for Australian businesses operating domestically versus international businesses operating in Australia. We would, however, caution about overplaying this impact, as feedback from major audit firms is that a large number of multi-nationals are already conducting their tax affairs, especially in terms of claimed deductions, very conservatively (i.e. foregoing eligible deductions).
The Government also announced an alignment of how off-market buybacks are taxed with on-market buybacks, with the loophole closure expected to save $550 million by 2026.
Equity market impacts appear muted, and we are reluctant to draw too much sensitivity from last night’s announcements at a sector or stock level. Equity market impacts appear muted, and we are reluctant to draw too much sensitivity from last night’s announcements at a sector or stock level.
The Government will not make any changes to the Stage 3 tax cuts in this budget, but will target multi-nationals and the rich. These measures are already largely in train, so the impact on markets will be immaterial. The Government will not make any changes to the Stage 3 tax cuts in this budget, but will target multi-nationals and the rich. These measures are already largely in train, so the impact on markets will be immaterial.
How will sectors be impacted?
Consumer discretionary—The Government will not make any changes to the Stage 3 tax cuts in this budget but will target multi-nationals and the rich in an effort to raise at least $3 billion in extra revenue. The ATO’s tax avoidance taskforce will collect this over four years under the plan. Again, these measures are already largely in train, so the impact on markets will be immaterial. Despite the absence of cost-of-living measures or policies designed at strengthening consumer sentiment directly, the flip side is less interest rate pressure, which is arguably more significant for equity markets at this point.
Childcare—Families on a median combined income of $120,000 with one child in early childhood education will save $1,780 in the first year. The plan is designed to support 96% of families and will cost $4.7 billion per annum to 2026 and $1.7 billion per annum thereafter.
Infrastructure—Another $2 billion-plus has been reallocated from Coalition grant programs and the re-profiling of promises. The Government has slated $9.7 billion for infrastructure promises flagged during the election campaign, such as $2.2 billion for Victoria’s Suburban Rail Loop. As they were election promises, this should be largely factored into the sector. More than $120 billion in transport infrastructure spend over the next decade has been outlined.
Telecommunications—The Government announced it will extend fibre access to 1.5 million more homes and businesses, and improve mobile coverage in regional, remote and natural disaster-prone areas.
Education—An additional 4,000 university places will be funded for teaching programs, with a planned focus on rural, low socio-economic and indigenous applicants. It is part of a package of 20,000 university places ($485 million), designed to tackle skills shortages in areas such as IT, nursing and engineering. The Government will fund 180,000 TAFE courses in areas such as care and the digital economy from next year. It will also spend $770 million on schools, students and teachers.
Transport—The Government has established a $20 billion fund for energy transmission, with $800 million of that going to cutting taxes on electric cars (see Green I\initiatives section below).
Green initiatives—The Government has proposed a cut to the fringe benefits tax on EVs, and this is already before Parliament (the 5% import tariff on EVs has already been removed). We are not convinced that faster EV penetration will be viewed as a negative for existing refiners/fuel stations. Nor do we think it changes the existing narrative around existing auto repairs and parts companies, where EV penetration rates are largely viewed as structural in nature. The Government has established a $20 billion fund for energy transmission and $800 million of that will go towards cutting taxes on EVs, building an EV charging network of 177 fast charging stations, and hydrogen refuelling stations on highways, as well as solar battery storage for up to 100,000 homes.
Aged care—A $3.9 billion investment into aged care was announced. $2.5 billion will go towards more residential care, and $1.4 billion will go towards ongoing COVID-19 care, as well as moves to prepare for major reforms to in-home care.
Defence—Defence funding will rise more than 2% of GDP over the forward estimates.
Health—$6.1 billion will go towards hospitals, Medicare, COVID-19 support, and improving access to health care. $230mn will be directed towards GPs. Relative to the budget set out by the prior Coalition Government in March 2022, healthcare spending is estimated to be approximately 1.5% per annum higher in FY23-26 under the Labor Government. The Disability Employment Services (DES) programme has been extended for two years to 30 June 2025, removing any uncertainty in the short term. Additionally, there has been a large increase in NDIS funding. The Government is reducing the maximum co-payment under the Pharmaceutical Benefit Scheme (PBS) from A$42.50 to A$30 per script, a 29% reduction from 1 January 2023. This should limit people delaying getting medicines. The public hospital sector received no ongoing additional funding related to COVID-19.
Housing—Last night’s budget delivered $350 million in additional federal funding to help deliver 10,000 affordable homes over five years from 2024, which is in addition to Labor’s existing election commitments.
Immigration—More funding and staff will be allocated to deplete the visa backlog, with Government forecasts based on a return to pre-migration net COVID levels of around 235,000 per annum. Arguably, this could be viewed as the most important measure in the budget for equity markets, given the implications for labour supply and housing demand.
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