In his second Budget delivered from Parliament House in Canberra last night, the Treasurer Jim Chalmers has announced a dramatic improvement in the nation’s fiscal position.
The FY23 budget is now forecast to register a surplus of $4.2bn (0.2% of GDP). This compares to the post-election October 2022 projection of a $37bn deficit (1.6% of GDP) and the $78bn deficit predicted in the April pre-election fiscal update.
The FY24 budget projection is for a modest deficit of $14bn compared to the October 2022 estimate of $44bn.
| 2022-23 | 2023-24 | 2024-25 | 2025-26 | 2026-27 | Total | ||
| 2022-23 October Budget | $bn | -36.9 | -44 | -51.3 | -49.6 | -53.9 | -235.7 |
| % of GDP | -1.5 | -1.8 | -2.0 | -1.8 | -1.9 | ||
| Revenue benefit economic & other changes | $bn | 42.1 | 42.2 | 21.7 | 15.5 | 25.0 | 146.5 |
| New Deficit Starting Point | $bn | 5.3 | -1.9 | -29.6 | -34.1 | -29.0 | -89.3 |
| New Policy changes | $bn | -1.1 | -12 | -5.4 | -2.5 | 0.5 | -20.5 |
| 2023-24 Budget | $bn | 4.2 | -13.9 | -35.1 | -36.6 | -28.5 | -109.9 |
| % of GDP | 0.2 | -0.5 | -1.3 | -1.3 | -1.0 |
Source: Refinitiv, Wilsons.
Commodity Price Revision Helps Budget Bottom Line
The dramatic improvement in the near-term budget position is due to an unexpected revenue boom underpinned by soaring commodity prices and a strong labour market driving higher company and personal tax receipts.
The government effectively banked the great majority (~$40bn) of the recent revenue boom to deliver the modest FY23 surplus, while it plans to spend around 30% of the expected ~$40bn revenue windfall in the FY24 budget to deliver a smaller than previously forecast deficit of $14bn (previously $44bn).
Back In Black But Not For Long
However, due to a combination of lower commodity price assumptions and inherent structural pressures on the budget, the deficit is expected to expand further with deficits of $35bn and a peak $37bn deficit forecast in FY25 and FY26 respectively forecast.
The budget then remains in deficit until at least 2033-34, though a combination of stronger growth assumptions, marginally less conservative commodity forecasts and some assumed cost savings in key programs (e.g. the NDIS) sees a lower structural deficit than projected at the October budget.
The large shift in the assumed budget position since the October estimate highlights the sensitivity of budget forecasting to macroeconomic and commodity price assumptions.
Beyond the benefit of the recent commodity price surge the government is expected to bank a further $22bn in revenue over the next few years due to changes in its commodity price forecasting methodology.
After underestimating commodity prices once again in the October budget, Treasury has altered their assumptions, now predicting that iron ore and coal prices will take four quarters before reverting to long term average rather than two.
Treasury has also raised its terminal assumptions for iron ore, coal and LNG adding $22bn to the budget bottom over the forecast period.
Debt and Interest Payments Lower
The new budget forecasts lower profiles for gross debt and interest payments relative to the forecast in the October budget.
The government is forecasting a reduction in the net interest bill in the order of $80bn over the next 12 years due largely to the revenue recovery that is expected to bring debt down by $300bn over the same period.
Gross debt is now expected to reach a peak of 36.5% of GDP in FY26. This is 10% lower and 5 years earlier than predicted in the October budget update.
Debt to GDP is then forecast to ease marginally from peak levels to sit at 32% by FY33.
Forecasting the NDIS to Get Back on Track
The NDIS remains a key area of structural budget pressure. Annual expenditure on the NDIS is expected to continue increasing rapidly, hitting $41.9bn next financial year and reaching $55.9bn by 2026-27.
The NDIS is forecast to grow at 10.4% per annum over the next decade, making it the fastest-growing major federal government expense, overtaking the cost of Australia’s burgeoning interest bill.
The updated forecast, down from 13.8% in the October budget. It is conditional on national cabinet’s target to moderate growth in the scheme’s costs by July 2026.
After conceding last month that the scheme had become “unsustainable”, Mr Albanese announced a target to reduce its annual growth rate to 8% by July 1, 2026, which was endorsed by national cabinet.
To slow growth and achieve the target, the government will outlay $733m on eight measures designed to improve decision-making at the NDIS, the agency that administers the program.
Defence, aged care and health are also applying structural pressure to the federal budget but interest payments and the NDIS remain the fastest growing structural imposts on the budget.
Economic Assumptions – Slower Growth but Easing Inflation
Real GDP growth is expected to slow to 1.5% in 2023–24, before recovering to 2.25% in 2024–25. The unemployment rate is expected to stay low by historical standards, rising modestly to 4.25% by 2024 and 4.5% by 2025. Wages growth is forecast to pick up further to 4% in 2023–24, its fastest pace since 2009, supported by the government’s actions to boost wages for Australia’s lowest paid. Wages are forecast to grow by 3.25% in 2024–25 delivering slightly positive real wage growth.
Inflation in Australia is now past its peak and has begun to moderate. The factors that caused the current inflationary period are beginning to ease and inflation is expected to return to target in 2025–26 (2.75%). The Government’s measures to deliver cost-of-living relief will directly reduce the CPI in 2023–24, and are not expected to add to broader inflationary pressures in the economy. These measures are expected to reduce inflation by 0.75% in 2023–24 according to Treasury.
| Outcome | Forecasts |
|||||
| 2022-23 | 2023-24 | 2024-25 | 2025-26 | 2026-27 | 2026-27 | |
| Real GDP (% YoY) | 3.7 | 3.25 | 1.5 | 2.25 | 2.75 | 2.75 |
| Employment (% YoY) | 3.6 | 2.5 | 1 | 1 | 1.75 | 1.75 |
| Unemployment rate (%) | 3.8 | 3.5 | 4.25 | 4.5 | 4.25 | 4.25 |
| Consumer price index (% YoY) | 6.1 | 6 | 3.25 | 2.75 | 2.5 | 2.5 |
| Wage price index (%) | 2.6 | 3.75 | 4 | 3.25 | 3.25 | 3.5 |
| Nominal GDP (% YoY) | 11 | 10.25 | 1.25 | 2.5 | 5.25 | 5.25 |
Source: Refinitiv, Wilsons.
Key Spending Measures
Energy bill relief
The $1.5bn package will benefit about 5.5 million households and 1 million small businesses. Up to $500 in rebates will be available for low-income households and up to $650 will also be paid to small businesses, as the government seeks to neutralise price rises for this year and 2024.
A separate $1.3bn fund will also be established to offer low-interest loans for home owners to make their homes more energy efficient. Warnings in last year's October budget of soaring power prices prompted a swift response from the government, capping the price of coal and gas and committing to taking pressure off power bills.
Emissions reductions
This Budget invests a further $4bn in Australia's plan to become a renewable energy superpower. It positions Australia to be a world leading hydrogen producer by investing $2bn in Hydrogen Headstart, a new program to support hydrogen production.
Other sectors are also being given financial support to reduce their emissions, like the resources and transport sectors.
Small businesses
A bonus tax discount to help small businesses electrify will be offered to all businesses with an annual turnover of less than $50m. The measure is expected to help up to 3.8 million small and medium-sized businesses, at a cost of $314m to the government over the next 4 years.
Building more homes
The government is offering new incentives to encourage the supply of housing by reducing the withholding tax rate for eligible fund payments from managed investment trusts attributed to newly constructed build-to-rent developments from 30% to 15%. The capital works tax deduction rate will be increased from 2.5% to 4%, increasing the after-tax returns for newly constructed build-to-rent developments.
Industry estimates this could unlock 150,000 rental properties over 10 years, boosting the supply of high-quality,
long-term rentals in the Australian market.
Job Seeker
The JobSeeker rate will permanently increase for all recipients by $40 a fortnight, at a cost of $4.9bn over five years. Additional targeted assistance for JobSeeker Payment recipients 55 and over will also come into effect in September.
Childcare
The government's $4.7bn childcare subsidy changes will come into effect from July 1. In short, it's good news for families with children in childcare and a household income below $530,000. For families earning less than $80,000, the subsidy for their first child will climb to 90%. For those on more than $80,000, that subsidy will progressively fall based on their income. These changes were a key election policy for Labour, and will come into place more than a year after the Albanese government took office.
Single parents
The cut-off for the single parenting payment will be lifted until the youngest child turns 14 (from 8). The lift will benefit about 57,000 parents, overwhelmingly women, at a cost of $1.9bn over 4 years.
Aged care
The government will commit $11.3bn to paying for a historic wage increase for aged care workers, which will come into effect from July. As a result, the wages for a registered nurse in aged care will rise by more than $10,000 a year, and more than $7,500 for an enrolled nurse.
Share Market Impacts
Overall, we don’t see the budget as having a material impact on the equity market.
Changes to the petroleum resource rent tax (PRRT) rules is the most significant item in the budget in our view. The large gas producers (WDS, STO) will have their tax deductions capped at 90% and will face tougher compliance under new measures aimed at raising $2.4bn over 4 years.
These changes were pre-announced over the weekend and were arguably better than feared by the market, which was reflected in the positive share price reactions of WDS and STO on Monday.
The modest cost of living relief measures could provide minor second-order benefits to consumer facing businesses like the supermarkets (WOW, COL), and low-income skewed retailers and services businesses (CKF, SUL, WES).
Expanded access to the Home Guarantee Scheme provides a positive read through to companies exposed to the housing market including online housing classifieds providers (REA, DHG) and developers (MGR, SGP).
Strategic Planning Implications
The budget did not make any significant personal revenue announcements. No changes to GST, capital gains tax or taxation of trusts, the ‘stage 3’ tax cuts even seem to be safe, for now.
The key announcements impacting investors are noted below:
Superannuation
- The Treasurer reaffirmed the new 15% tax applying to income and unrealised gains for superannuants who hold over $3m in their super accounts. Estimates of revenue to be raised from this measure have not changed which indicates the Government won’t be considering indexing the cap or altering the application of the additional tax to unrealised gains despite fierce lobbying. If these measures become law, we expect retirees to consider moving all or part of the excess to a personal account if the average tax rate is lower. For those who are already paying 30% tax through a trust and corporate beneficiary structure there will still be financial benefits. Relocating those ‘excess’ assets to a personal or trust structure will avoid this new tax on unrealised gains and potentially save tax when a death benefit is paid to a non-dependent (i.e. adult child) as the 17% “death tax” can be avoided. It would also be prudent at this time to review the family’s asset succession plan and make adjustments where necessary.
- From 1 July 2026, Superannuation Guarantee must be paid on the date the salary is paid to the employee. Presently, employers are required to remit Superannuation Guarantee on a quarterly basis. This is seen as a positive measure for employees as the contributions will be invested sooner. It will also help reduce the risk of inadvertent cap breaches given it will be easier to plan for personal contributions to maximise the concessional contribution cap with more timely information being available to advisors.
- The Budget was silent on pension minimums which indicates they will revert back to the normal percentages for FY24. This means, for some, their pension payment will need to double to ensure the continuation of the pension tax concessions. For those who do not rely on this income to meet their living costs, the pension payment should be made shortly before 30 June 2024.
- The transfer balance cap has not been frozen as some commentators speculated which means that from 1 July 2023 an additional $200,000 can be used to acquire an account-based pension (i.e. the Transfer Balance Cap will index up to $1.9m). For some, it may be beneficial to defer the commencement of their retirement pension until 1 July 2023.
Wilsons can assist with strategies to manage these superannuation changes. Please reach out if you would like to discuss.
Compliance
- Funding tax compliance measures has a proven track record of providing significant returns for each dollar spent. It is therefore not surprising to see an additional $89.6m funding to the ATO and $1.2m to Treasury to extend the Personal Income Tax compliance program for two years from 1 July 2025. Their focus will be on deductions, short-term rental properties and to ensure that properties are genuinely available to rent. An additional $588.8m will be provided to the ATO over 4 years from 1 July 2023 to continue activities to promote GST compliance.
Business taxation
- A temporary increase in the instant asset write-off to $20,000 for eligible small businesses will apply from 1 July 2023 to 30 June 2024 (i.e. businesses with an aggregated turnover of less than $10m).
- A new Small Business Energy Incentive has been announced for small and medium businesses (i.e. with aggregated turnover of less than $50m) permits an additional 20% deduction of the cost of eligible depreciating assets that support electrification and the more efficient use of energy by these businesses. Examples given in the Budget papers include the acquisition of new energy efficient refrigerators, assets that support electrification such as heat pumps and electric heating or cooling systems, and demand management assets such as batteries. Up to $100,000 of expenditure will be eligible for this incentive which will be available for assets first used or installed and ready for use from 1 July 2023 until 30 June 2024 with the maximum bonus deduction being $20,000.
Housing
- Accelerated depreciation for Housing (Build-to-rent developments) of 4% (up from 2.5%) and halving of the final withholding tax on eligible fund payments from managed investment trusts (MITs) to 15% for new projects commencing after 7.30pm 9 May 2023. To qualify, developments must exceed 50 apartments / dwellings made available for rent to the general public. They must be retained under single ownership for 10 years before being sold and lease contracts must be for a minimum of 3 years. The reduced MIT rate will apply from 1 July 2024.
Other measures
- Introduction of a sunset clause for plug in hybrid electric cars that will be exempt from Fringe Benefits Tax of 1 July 2025. This measure relates to the 2022–23 October Budget measure titled Powering Australia – Electric Car Discount.
- The Government will also not proceed with 3 separate patent box measures announced by the former Government in the 2021–22 and 2022–23 March Budgets.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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