A Budget with no surprises...

Other than the energy rebate for all households, almost everything had been announced in the lead up to last night's Federal Budget, so no surprises. The following is a summary...

The key measures included...

• $5.4bn in a broader round of cost-of-living relief, including broadening energy bill relief for all households and extending rent assistance.

• A renewed focus on the benefits to all households from the Stage 3 tax cuts that were rejigged in January (worth an average of $36/wk). 

• $3bn for community pharmacies for cheaper medication and $6.2bn on Medicare and expanding the Pharmaceutical Benefits Scheme.

• $9.6bn on housing & crisis accommodation and extra on related infrastructure (although much is a continuation of existing programs) and $89m to train home builders (although the planned 20,000 new tradies are only 1.7% of the existing construction workforce).

• Prac payments for nurses, midwifes and social workers.

• A change to student debt indexation which cuts the value of debt with no near-term budget cost as it won’t involve a handout to students.

• A mix of subsidies, tax breaks, cheap loans, relaxed foreign investment rules & less red tape to boost investment in government chosen industries as part of the $22.7bn “FMIA” policy.

• Caps on international student arrivals by each university which can be raised if they build more student accommodation.

• Extra spending on aged care & childcare to cover wage rises.

• Freeze on deeming rates for low-income households.

Budget savings include:

• Further savings in areas like consultants, compliance and efficiencies and reducing spending on the National Disability Insurance Scheme.

The Government's economic assumptions...

The Government left its growth forecasts unchanged for this year but revised them down slightly for the next two years. Notably it has revised down slightly its inflation forecasts and still sees wages growth slowing from here as does the RBA, but an obvious risk to this is that its support for wage increases in certain industries has a flow on effect to other industries (just as the aged care wage rises last year seems to be leading to higher wages for childcare workers). It also sees lower inflation this year and next than the RBA and this is partly due to a continuation of cost-of-living relief measures that it sees as lowering measured inflation (by 0.5% in 2024-25), whereas the RBA assumed the measures lapse.

The Government now sees net immigration of 395,000 this financial year (MYEFO was 375,000), falling to 260,000 in 2024-25, taking population growth down to around 1.4% from 2.4% in 2022-23. 

The winners and losers...

Winners include: low and middle income households; pensioners; women; medicine users; aged & child care workers; low income renters; students; apprentices; home builders; students; defence; critical mineral projects; and clean energy manufacturers. Losers include: consultants, universities, foreign students, backpackers and dodgy NDIS providers.

Verdict...

The positives in the Budget include: another surplus; the cost-of-living measures will help ease pressure on the most vulnerable and some will lower measured inflation with a second round flow on to lower indexed price rises and inflation expectations; tax breaks & streamlined approvals should help boost medium term business investment; & there is still scope for revenue to surprise with commodity price assumptions.

However, the Budget has several significant weaknesses in relation to:

• Inflation. The cost-of-living measures will help lower measured inflation. But the new stimulus risks boosting demand. And Government support for high wage increases for some sectors risks adding to wages growth given the flow on and influencing effects at a time when wages growth is already at its maximum level consistent with the inflation target. All of which risks making the RBA’s job harder.

• Structural deficits. The Budget has added to medium term structural deficits. This leaves it vulnerable if the economy weakens and sees no money put aside for a rainy day over the forecast period.

• Bigger government. Spending as a share of GDP is seen settling well above that seen pre pandemic thereby locking in a bigger government sector which risks further slowing medium term productivity growth.

• FMIA. While “made in Australia” is popular and there is talk of a “new growth” model, its reliance on protectionism and government picking winners has been tried and failed in the past with a long-term cost to productivity & living standards. Moving to net zero is one thing, but this doesn’t mean we need to make solar panels or quantum computing or that we have a comparative advantage in them. Just because other countries are deploying subsidies is no reason for Australia to do so. We should just take the subsidised products! 

• Productivity. Beyond the hopes of FMIA there is not a lot here to improve Australia’s medium term productivity performance. This is the key to growth in living standards but needs urgent reform in terms of tax, competition, the non-market services sector, industrial relations, education and training and energy generation. Fortunately, the Government is moving on the last two at least.

• Housing. The latest housing measures are welcome, but are unlikely to be enough to hit the 1.2 million new homes over five years objective with the supply shortfall set to remain unless immigration plunges.

Rick Maggi, CFP