Federal budget breakdown – what it means for investors.

Posted by Gavin Chau

If I had to summarise the budget in a word, it would be ‘OK’. It didn’t even warrant a mention on a WhatsApp group full of economists, technologists, investors, bankers, and business owners I’m on.

These are the key points.

The federal budget will provide cost of living relief through tax cuts on 1 July, lower power bills, higher welfare payments, and relief for small businesses. In short, the government is trying to unf*ck the things they messed up in the first place through an over-accommodative, then over-restrictive monetary policy and an enormous immigration intake. Having said that, it’s way better than the alternative.

How it affects investors largely depends on whether the budget is inflationary or deflationary and how it affects interest rates. Of course, the Labor government will do its best to secure a rate cut before the election to give them the best chance of getting re-elected.

Let’s look at these one at a time.

On the cost-of-living front, there’s a $300 energy bill subsidy and a $325 rebate for small businesses. Although small, it does help a little, given that energy prices have increased about 30% over the past year. More importantly, they should reduce the energy inflation rate by half a percentage point.

There are also some cuts to HECS debts (around $3bn based on the 2023 indexation). The exact amount is yet to be determined, but it is based on a formula that includes how much accommodation each university provides to students.

The cost of PBS medicines (Pharmaceutical Benefits Scheme) has also been frozen. The co-payment amount that must be contributed to the cost of PBS subsidized medicines will be frozen at $7.70 for pensioners and concession card holders until the end of 2029 and at $31.60 for all other Medicare card holders until the end of 2025.

Next, stage three tax cuts take place starting on the 1^st of July. The cynic in me thinks it’s another way to buy election votes. Nevertheless, any form of tax relief is welcome, and it does go some way towards fixing the rising cost of living. The change is likely minimal for property investors – it spreads some of the tax returns you would have received at the end of the year throughout your weekly salary. All of which helps to manage your cashflows.

Small businesses with an annual turnover of less than $10m will also get tax relief through an instant asset write-off extension. This will allow an immediate write-off for eligible assets under $20k for a further 12 months until June 30, 2025.

On the social security and aged care front, deeming rates will stay frozen for the remainder of the financial year. These assess income from financial investments likely to benefit age pensioners and other income support recipients.

Rent support will increase. On September 20th, the maximum Commonwealth Rent Assistance payment will increase by 10% (in addition to the usual half-yearly indexation). This will benefit the elderly and those requiring some government assistance.

Overall, the budget is likely neutral regarding its effect on inflation and unlikely to affect the RBA’s decisions.

Regarding the inflation outlook, it was interesting that the treasury expects inflation to fall much faster than the RBA, with headline inflation expected to return to 2.75% by the middle of next year. This is likely because of the subsidies on rent and energy inflation. Overall, our view on the interest rate situation hasn’t changed, and we still expect interest rates to fall in the second half of the year.

What else has been happening?

The unemployment figures were released on Thursday last week, jumping to 4.1% from 3.9%. The unemployment rate is a relatively volatile measure, never really moving up or down in a straight line, but it’s moving in the right direction when we zoom out. This latest result may have erased any possibility of a hike, as some forecasters were mumbling about, and the next move will be down. We will likely hit the 4.5% mark by the middle of the year, which is generally accepted as the NAIRU figure (nonaccelerating inflation rate of unemployment). In short, we see an end to wage inflation, which has been holding up a rate cut.

Posted by Gavin Chau, on 21st May 2024