The stimulus effect of the federal budget has caused the Australian share market to soar with the S&P/ASX200 finishing 2.59 per cent higher at 5941.6 with the All Ordinaries Index rising 2.54 per cent to 6135.1. T
The federal budget’s overall stimulatory effect should be in the minds of every investor, but which sectors are benefiting and which are at a disadvantage as a result of the announcement? Let’s dive in.
A snapshot of the Federal Budget winners and losers
- The Construction Industry
- Regional Australia
- Young Australians
- Older Australians/Carers
- Mental Health
- The Economy
- Migration Rates
- Child Care
- The Climate
Benefits for small and medium businesses
The stakes are high for small to mediums business survival, even with the stimulus measures that have already been put in place. JobKeeper and JobSeeker will simmer down, but the Government will offset this with tax cuts and multiple business investment incentives. Business investment and cash flow look to be assisted with temporary tax initiatives for businesses with a turnover of less than $5 billion. These will include temporary full expensing of depreciable assets with no limit on the value of the asset and the allowance for tax losses to be offset against previous profits.
As mentioned by Finance Minister Mathias Cormann, “We will be providing six months of further support, both through JobKeeper and the enhanced JobSeeker arrangements. We will be lowering those payments in order to phase them out, in order to wean businesses off this temporary crisis support. Ultimately we want to see businesses able to pay the wages of their employees out of their income rather than having to rely on taxpayer support.”
The Government released its own forecasts stating that non-mining business investment will fall by 14.5 per cent in FY21, increasing 7.5 per cent the following year. Additional support for residential construction and additional funding for the First Home Loan Deposit Scheme mean good news for the construction company with an additional $1 billion to support bond issuance by the National Housing Finance and Investment Corporation to create more interest in investment of affordable housing.
An investment in specific career paths
The unemployment rate was obviously a big focus in this year’s budget with a goal of bringing it back to 6 per cent or lower. There will be no extension to the JobKeeper subsidy after March 2021. The Government estimates the unemployment rate will peak at 8 per cent in the December quarter and is placing a big focus on creating jobs for young Australians with training and apprenticeships.
As Treasurer Josh Frydenberg states, “We’ve got existing programs, which are important, but what you’ll see in the budget is more investment in infrastructure and tax incentives for more business investment. The experience of young people being out of the workforce for a long time is hard. It’s Treasury’s forecast that people entering into the workforce are expected to earn 8 per cent less in their first year in work and 3.5 per cent less after five years in the workforce as a result of this crisis.”
In all of this, measures for females who have left the workforce or lost their jobs or left the workforce were limited with only $240.4 million in funding for the Women’s Economic Security Statement over the next five years.
Josh Frydenberg also explains, “We are investing record amounts in apprenticeships, $4 billion. but it is to keep current apprentices and to attract 100,000 new apprentices. We have 150,000 short courses in specified areas where there are job needs and having created a $1 billion Job Trainer Fund with 340,000 training positions, so there is a whole suite of measures designed to boost the employability of Australian workers and to encourage businesses to take them on.
The push to get us spending
Consumers are a big part of the economic recovery with tax cuts for individuals to encourage spending. The Low and Middle-Income Tax Offset (LIMTO) has been extended which is expected to help boost household income by $6.9 billion in FY21. These tax measures are estimated to increase GDP by $2.5 billion in FY21.
Peter Godber from The Tax Institute explains, “Bringing forward the Stage 2 personal income tax cuts is certainly a welcome measure. This will put cash in pockets as soon as the ATO puts out new tax scales. The Government has been generous in keeping the low and middle-income tax offset for the current year, which will be payable next year on lodging tax returns.”
Along with this, two direct cash payments of $250 have been added for eligible pensioners, veterans, low-income families and concession cardholders. It is interesting to note that the last time a boost like this was provided, one in every five dollars was saved. Considering the current economic climate, banking on consumers spending more is questionable at best.
The increased investment into cyber
The increase in business and government digital adoption also means an increase in cybersecurity risk. To offset this, there will be an investment in Australia’s cyber resilience is more important than ever. Cyber is key to facilitating Australia’s economic recovery, and Australia’s Cyber Security Strategy looks to uplift security and resilience while driving sustainable change.
The Federal Budget will increase public and private sector collaboration with a shift to centralised cyber services and information sharing. The plan includes $26.5 million invested in a Cyber Skills Partnerships Innovation Fund, encouraging business and academia to partner together to improve cybersecurity skills. This is estimated to create 17,000 jobs in Australia by 2026.
The strategy focuses on scholarships, apprenticeships, internships to incentivise Australian businesses to build a local workforce as opposed to outsourcing various IT roles overseas.
Interest rates will stay low
The cost of debt considered in this budget means the RBA will keep interest rates low with net interest expected to hold at 0.7 per cent of GDP and dropping even further after two years. We’ve seen an increase in Government debt; however, the cost of servicing that is far less than the figures of the last recession.
RBA Governor, Philip Lowe issued a statement that explained, “Even though the worst of this contraction has now passed, the outlook remains highly uncertain. We will not increase the cash rate target until progress is being made towards full employment and [we are] confident that inflation will be sustainable within the two to three per cent target band.”
All of this is needs to be considered along with the fact that this budget is not working very hard at trying to boost direct spending. Less than a quarter of the $90 billion in measures is focussed on direct spending.
Additional funds of $10 billion have been dedicated to infrastructure spending over the four-year projections in the ten-year pipeline of $110 billion. The budget also includes an additional $2 billion in Road Safety Programs, and $1 billion over the next two years for the Local Roads and Community Infrastructure Program.
The most significant change for super as a result of the budget was the current tax relief for merging superannuation funds being made permanent from 1 July 2020. Another change sees individuals aged 65 and 66 able to make voluntary concessional and non-concessional contributions, without a requirement for the “work test”.
The age limit for spouse contributions will increase from 69 to 74 and insurance within superannuation now requiring an opt-in for individual accounts with balances of less than $6,000, or new accounts for people under the age of 25. Finally, there are several measures targeted at reducing costs for superannuation funds with an additional $19.3 million provided to the Australian Taxation Office over three years to enable electronic requests to be sent to super funds for the release of payments.
Much of this relies on a vaccine
It is vital to remember that the economic forecasting of this budget sits at the mercy of a virus. The budget has allowances for further localised outbreaks of COVID-19 but is primarily based on the assumption that a vaccination program will be in place by late 2021.
Population growth is forecast to fall as overseas migration lessens to the largest drop in net overseas migration since 1946. This creates another economic challenge, as migration has a significant and direct effect on how well the economy is going.
The budget round up
This budget is aiming at a private sector-driven recovery which in the past has proven to be a challenge. For example, non-mining business investment took quite a while to recover after the global financial crisis with household savings rate unable to return to pre-GFC levels. The budget is focused on an ongoing COVID battle that ist will combat with massive, temporary spending. For the investor, the word “turbulent” is possibly the best way to sum things up moving forward.