Issue: Friday 14th May 2021
The days directly after Budget are arguably more important than Budget day itself.
With the Budget announcement out of the way, there is more space to digest and to consider the commitments (particularly their context) – As always, the opinions are partisan, polarising and prolific!!
One Australian who seems very happy is Treasurer Josh Frydenberg. Two years ago, the Budget was Back in Black, now it’s Simply Red, and the politics are working well both ways.
On the back of an economy that has bounced back far more sharply than the treasury (or just about anyone else) expected, Mr Frydenberg has embraced the money tree.
The bounty from higher-than-expected tax collections, a much higher-than-expected iron ore price, and lower than expected unemployment benefits should amount to A$26.8 billion this financial year, $15.5 billion the next, and $18.6 billion the year after that.
But rather than bank those riches and improve the budget bottom line, as the Coalition’s budget strategy has historically required it to do, the government has instead decided to spend it all. In doing so, Frydenberg has managed to engineer a remarkable shift in Liberal party economic philosophy.
Whether it is opportunistic or simply a willingness to adapt it seems surpluses are ‘so last year’.
What’s Notable For Financial Services
From an industry perspective, it was a ‘supercharged’ budget that provided several improved flexibility measures for superannuants.
In Summary, the significant announcements include:
- The work test – The requirement for an individual to work for 40 hours in 30 consecutive days in order to contribute to super will be abolished for non-concessional contributions. Meaning anyone under the age of 75 will be able to make personal non-concessional contributions irrespective of their employment situation.
- The non-concessional bring forward provisions, currently available up to age 65, will be extended to the under 75s as well – subject to the usual caps, of course.
- Downsizer contribution age eligibility will be expanded from those over 65 to those over 60.
- SMSF Trustee Residency Changes – The Government has proposed the relaxation of residency requirements.
In our view these are all welcome measures for people approaching retirement, particularly as they address Australia’s increasing longevity rate, later inheritances, simplifying retirement life and providing additional retirement income options. The team at FinSec are already brainstorming new strategies!
As always we will have to wait for the actual legislation to be passed and receive Royal Assent. It is, therefore, expected that these measures will not be operational until 1 July 2022. Keep your fingers crossed.
For more detail on these announcements and others relating to financial advice, please click here.
So, Where Is It All Heading?
Recovery, and an even more resilient economy, according to the government. Election year aside, unprecedented expansion in spending and tax concessions is at this Budget’s core.
Frydenberg’s priority is of course driving down unemployment, of which the extra $17.7 billion it wants to spend on aged care over four years ought to help, as should the additional $13.2 billion spend on the National Disability Insurance Scheme. The $1.7 billion it is spending on making childcare more affordable should both create jobs in the sector and free up more parents to return to work, and an extra $20 billion in business tax concessions won’t go astray.
Most economists support the Treasurer’s increased spending to grow the economy and drive down unemployment. He has listened to the experts and got the big picture right.
Our view is it’s a budget we had to have. An economy, arguably still recoverying from the GFC then decimated by a 1 in 100 year pandemic, probably calls for an approach of a different kind. We need employment, business investment, and confidence. Therefore, this job creation and restructuring of the economic plan is justified.
The much talked about wage growth will not happen until slack in employment market has been taken up and inflation returns to a normal range – this Budget goes a long way to achieving this.
As for an early election… most reports will have us believe there is nothing surer, here at FinSec we think it is too early to make that call.
For this Budget to work, however, there are a few brave assumptions at play.
For instance, international travel returning by mid-2022 and vaccinations being completed by the end of this year. This also assumes no mutations or further outbreaks in the interim.
As touched on previously, we also need to hit economic growth of 4.25% next financial year (a rate we haven’t seen since the late 90s), and unemployment needs to hit 4.5% in 2023-24 and 2024-25. That’s better than pre-pandemic levels but not yet close to the 4%-or-lower number many economists (including RBA governor Philip Lowe) think is required to get wages growing meaningfully.
And then there is China.
Only a fortnight ago, defence Minister Peter Dutton warned that war with China could not be ruled out and we even had a military leader telling staff to prepare. Yet this Budget assumes China will stay our biggest trade partner and won’t turn off our exports anytime soon – China buys 100 per cent of our nickel exports, 82 per cent of our iron ore, 77 per cent of our wool, 55 per cent of our processed food and 27 per cent of our coal. Mmm…
Does the 2021 budget have a major blindspot in its neglect of higher education?
Australia’s higher education system is highly efficient and among the best in the world. Its reputation ensures that education is Australia’s fourth-largest export industry. In 2019 it brought in A$9.8 billion and was estimated to be worth close to $40 billion to the Australian economy.
Much of this revenue is used to cross-subsidise highly-regarded research that can drive technological innovation and help us respond to problems like… well, like global pandemics, for instance.
With national borders closed, universities are struggling to attract new cohorts of international students to replace those who complete their courses. And, with a penchant for studying on campus, Australia is increasingly at a disadvantage compared with the UK, US and Canada.
The Morrison government didn’t create the pandemic that triggered the collapse of international student revenue. But it is keeping our borders closed (understandable) without rendering any significant assistance to address the problem.
The Federal Budget is every cartoonist and headline writer’s time to shine. From Great Expectations to Wheel of Fortune and even AC/DC, this year they went all in to grab your attention. But, our favourite has to be all the Hot Chocolate references. ABC TV declared this budget ‘Everyone’s a winner, baby, that’s the truth’ AND The Australian featured ‘I believe in miracles’ on the front page.
Many of us are old enough to own and enjoy Hot Chocolate’s Greatest Hits, and it’s the (Budget) album that keeps on giving. How about ‘Don’t stop it now’, ‘So you win again’, ‘I’ll put you together again’ and ‘I believe’.
Stay safe and look after one another. Enjoy the weekend and as always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.