The Morrison government released its third budget overnight, which is also the third for Treasurer Josh Frydenberg. As budgets’ goes there was nothing particularly sensitive that has the potential to have a big impact on financial markets in the near term. In fact, with the federal election around the corner, this budget was all about the beginning of the Coalition’s election campaign.
Will These Measures Even Make it Through?
Many of the announcements that were made may not even see the light of day if, as the polls suggest, the Coalition loses the upcoming election. To this extent, it may well be the first time that the Budget response from the Opposition has the potential to carry more weight from a market perspective given the current political environment.
So, in our view this budget is a classic election budget with an approach to reduce the cost of living on the back of rising inflation particularly for low to middle income earners (via a new tax offset) along with reducing the government’s petrol excise tax by $0.20c per litre for the next six months. Extra spending on areas such as skills training, housing affordability (via expanding the existing Home Guarantee Scheme), enhancing paid parental leave including increased funding for child care and early education, improving manufacturing capabilities, infrastructure, trade & tourism, climate & the environment, health, defence and national security as well as a focus on rural and regional Australia were all part of the Government’s agenda.
Minimal Changes to Superannuation
One positive was there were minimal changes announced around superannuation, with the extension of the 50% minimum pension drawdown extended to the 2022/23 financial year.
How Do the Numbers Look?
Given the fiscal spend over the last two years the deficit is set to remain until 2026 (est -1.6% by 2025/26), with the 2022/23 deficit estimated to be A$78bn (-3.4% of GDP). However, this is an improvement of ~1.0% from earlier estimates, given the overall pick up in the economy over the last 12 months. Overall, the government remains focused on reducing debt as a key priority. As of June 2022, net government debt is estimated to be 27.6% of GDP (A$631.5bn) and rising to 33.1% by June 2026.
In regard to the Budget numbers, spending is expected to fall in 2022/23 to 27.2% of GDP, compared to 27.8% in in 2021/22. It peaked at 31.6% in 2020/21 due to the pandemic relief payments and other subsidies. Spending is then expected to fall to 26.3% in 2025/26 but lift again in 2032/33 to 26.5%. This is due to further additional investment in the NDIS and aged care, which has meant that these payments as a share of the economy are higher than pre pandemic.
As it relates to revenue, it is expected to fall to 23.8% of GDP in 2022/23, from 24.3% in 2021/22. This is largely due to the lift in the low to middle income tax offset as well as the cut in the petrol excise tax. Revenue is then expected to lift again to 24.7% of GDP in 2023/24 and 25.8% in 2032/33 as the economy improves.
On the economic side, GDP growth is forecast to be 3.5% 2022/23, before settling back to a more ‘normal’ level of 2.5% by 2023/24. Headline inflation is set to remain above the RBA’s target level for 2022/23, peaking at 4.25% before moving lower to 2.75% by 2023/24. We see little change to the RBA’s approach to monetary policy from the Budget and expect that the RBA will begin to look moving the cash rate higher through the back end of the year should inflation remain well above its 2-3% target band. And while higher official interest rates are expected, it is important to note that the cost of debt is issued at a fixed rate and the average maturity term of Commonwealth Government securities is around 7.2 years. This has lifted from 4.8 years back in 2009/10. Overall, this means that it takes longer for higher interest rates to impact interest costs.
The 2022/23 Budget also sees the Federal Government transition to the second phase of the Economic and Fiscal Strategy. This follows large fiscal stimulus during the pandemic and ensuring the economic recovery and low unemployment post the worst of the COVID period. The focus of this budget has been to ensure continued economic growth over the medium term and using this to stabilise gross and net debt to GDP ratios over the next 3-5 years.
The other main target of the Government is to maintain taxes within the 23.9% tax to GDP bracket. Both these objectives are forecast in this Budget and will be crucial in the Government achieving its goals. The Government also expects that these outcomes will be complemented by using its balance sheet for productivity enhancing investments as well as ongoing structural reforms. All with the aim of boosting economic growth and seeing unemployment remain below 4.0%. However, wages growth is set to remain tepid with only a rise of 3.25% by 2Q23.
Infrastructure continues to be a big winner. In addition to a further A$17.9bn (total A$120bn spend) on infrastructure projects over the next 10yrs, with Vic and NSW set to be the biggest beneficiaries via the A$3.1bn in new commitments to deliver the A$3.6bn Melbourne Intermodal Terminal Package. The budget also included a further A$7.1bn for transformative investments in regional Australia with a focus on areas such as agriculture production, low emissions manufacturing and renewable energy.
Overall, we believe this is a budget that is aimed squarely at the upcoming federal election, targeting those voters who have seen higher inflation restrict their wealth outlook. However, we do not expect it to have any impact on financial markets, consumer or business confidence in the near term. Financial markets will remain fixated on the outcome of the events in Ukraine along with further rate moves by the US Federal Reserve. While there are some definite election sweeteners, the extent of the Budget deficit and associated higher cost of living (and inflation) does restrict the ability for the Government to ‘splash the cash’. That said, we do expect further spending announcements closer to the election. So, buckle up, it’s going to be an interesting ride over the next 8 weeks.
Piers Bolger is Chief Investment Officer at Viridian Advisory.
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