On 25 October 2022, the Treasurer announced the Government’s plan for a more inclusive and sustainable economy. He advised that this budget is in line with the Labor’s five-point Economic Plan, aiming to reduce the costs of living, drive productivity growth and expand the economy’s capacity to alleviate supply-side pressures, increase real wages and genuine economic investment for Australians.
There was great anticipation for the updated Federal Budget, and as usually occurs with great expectation, this one was a fizzle. There have been various commentators with various views, and we agree with most of them that there is not much to this Budget at all. Some people have called it the Shuffling of the Deck of Cards, instead of a new set of cards.
The fact is that inflation is here to stay, as the current inflationary position is caused more by a lack of supply than overheated demand. That is; even if you put interest rates to 12%, it will not get the car you ordered to get here any quicker. The blowout in the wait times is now, in many instances, over 12 months. So, the cost of living pressures are likely to continue.
This Budget may not provide enough support for households in managing the cost of living. While some initiatives, such as increasing childcare subsidies, will help, some economic realities still prevail. Many businesses, especially small to medium-sized businesses, are still feeling the impact of the COVID-19 pandemic and rising prices and interest rates.
The Government has announced a range of items, which in our view are not life-changing. Many clients have concerns about how the Government announcements and policies will affect them and their day-to-day lives (interest rates, taxes etc). Some clients want to know more than others, about how the budget (and economic issues) may affect them.
So we have summarised our analysis into the following main areas of concern:
- RBA & Interest rates
- Individual tax rates & investors
- Superannuation & investors
- Business & employers
- Childcare & parental leave
- Retirees & aged care
- Property & infrastructure
- International relations
The Budget flagged some fairly bracing economic expectations:
- Inflation expected to peak at 7.75% in the December quarter and will persist at higher rates for longer than expected before easing to 3.5% by June 2024.
- Real GDP is forecast to grow to 3.25% in 2022-23 then retract to 1.5% in 2023-24.
- Electricity prices are expected to increase nationally by an average of 20% in late 2022, with retail electricity prices expected to rise by a further 30% in 2023-24.
- The deficit sits at $36.9bn, while this is better than originally estimated, the deficit expands to $49.5bn by 2025-26.
- Tight labour market conditions are expected to see annual wage growth pick up to 3.75% by June 2023.
- Even so, high inflation is expected to see real wages fall over 2022-23 before rising slightly over 2023-24. That is, your wages might increase but the gains will be eaten away by the increasing cost of living.
Our recent economic success has resulted in an increase in taxes collected, and the government finds itself in s budget balancing act, between election promises, and avoiding inflationary pressures.
The key issue on everyone’s minds is what is going to happen with interest rates. Again there are many differing views and opinions. The overwhelming view appears to be that due to the lower deficit (so the Government not spending as much money!), there is a lower need to increase interest rates.
BT (part of the Westpac group) have provided us with further background as follows:
We expect the RBA to raise the cash rate to a peak of 3.60% early next year, from the current cash rate of 2.60%. Interest-rate markets expect the cash rate to rise to a higher rate of around 4.20% and for this peak to occur later in 2023.
The budget does little to stoke inflation with much of the tax revenue windfall banked and spending mostly very targeted. Additionally, most of the $9.8 billion of net impacts due to policy decisions occur in the final two years of the forward estimates, when inflation is expected to have declined from the current high levels.
Inflation is forecast to be more persistent. Annual inflation is expected to peak at 7.75% in late 2022, before moderating gradually to 3.5% by June 2024. Inflation is forecast to fall to the mid-point of the RBA’s 2-3% band by June 2025 and then stay there.
The Government’s peak for inflation matches the RBA’s forecasts (both timing and size). It is also consistent with our own view.
However, the Government is betting on a faster decline in inflation in 2022-23 compared with the RBA. We think the decline is too rapid and too early. The Government has inflation returning to the middle of the band in 2024-25; we do not expect inflation to return to the band until late 2025, and even then – just brushing the top of the band only.
The debate continues on whether the tax cuts would be maintained and passed on or not; for now there is no change, but there are two more budgets before 2024.
Other announcements relate to:
- Cryptocurrencies are not treated as a foreign currency
- Additional funding for floods and other natural disasters
- Funding for community batteries for household solar
- Which tax evasions and avoidances are being targeted by the Australian Tax office
The major change to affect clients is the Downsizer Contribution being reduced to the age of 55 from 60.
Superannuation, in our view, still remains the most tax-effective structure and provides the opportunity for many clients to work towards a tax-effective and tax-free retirement.
Some of the other changes or announcements are not major and do not affect a high number of clients.
A number of measures aimed at reducing tax avoidance options available to multinational organisations have been announced.
- Australian public companies to disclose information on the number of subsidiaries and their country of tax domicile.
- Thin capitalisation rules to introduce an earnings-based test.
- Global entities denied deductions for intangibles
- Self-assessment of intangible assets, due to commence on 1 July 2023, has now been removed.
Other announcements include:
- Energy efficiency grants for small to medium enterprises wishing to upgrade their equipment and facilities.
- A dramatic jump in penalties for competition and consumer law breaches
- Ridesharing reporting requirements have been delayed.
Summary of Spending measures for Families:
- An additional $531.6 million over four years and $619.3 million per year thereafter to enhance and provide more flexibility to the paid parental leave scheme.
- From 1 July 2023 the paid parental leave scheme will be flexible for families so that either parent is able to claim the payment. Parents will also be able to claim weeks of the payment concurrently so they can take leave at the same time.
- From 1 July 2024 the scheme will be expanded by two additional weeks per year until it reaches 26 weeks from 1 July 2026.
- $4.7 billion over four years to improve childcare affordability by increasing the childcare subsidy rate for single child families to 90% for family incomes of up to $80,000. The subsidy is tapered by 0.2% for every $1,000 of family income above $80,000.
- The childcare subsidy has increased for all families with combined incomes of less than $530,000.
Age and veteran pensioners will be able to work and earn more before their pension is reduced.
All aged-care facilities are required to have a registered nurse onsite 24 hours per day, 7 days a week, from 1 July 2023.
The income test limits will be increased to $90,000 for singles and $144,000 for couples in order to access the Commonwealth Seniors Health Card (CSHC).
The assets test exemption for principal home sale proceeds will be extended from 12 months to 24 months for income support recipients.
Total and permanent incapacity payments to veterans will increase by $1,000 per year.
New investment funds.
The Government has unveiled a raft of new investment funds, which will act as seed funding for future expenditures. The investment income from these funds will be used to finance future spending rather than financing the spending now using debt. They include:
- A housing fund with an initial investment of $10 billion funds the delivery of 30,000 social and affordable homes.
- $20 billion for the rewiring Australia fund to expand and modernise the electricity grid and unlock renewables.
- The Government will establish the Powering the Regions Fund with $1.9 billion.
The Government has also committed over $275 million to promote electric and hydrogen vehicles and infrastructure to reduce emissions from Australia’s road transport sector.
Several other infrastructure projects will receive additional funding to prioritise them, including $400 million for the Alice Springs to Halls Creek Corridor upgrade and $125m for electric bus charging infrastructure in Perth.
The Government announced several announcements and initiatives to assist with various international and foreign policy initiatives.
Foreign investment review board fees increase.
The Government has increased foreign investment fees and will raise financial penalties for breaches related to residential land. Fees doubled on 29 July 2022 for all applications made under the foreign investment framework. The maximum financial penalties that can be applied for breaches in relation to residential land will also double on 1 January 2023.
Working with our Pacific Neighbours
- Australia’s relationship with the Pacific has come into sharp focus of late. The Budget implements a series of initiatives to support the development and labour mobility in the region:
- Additional infrastructure investment of $500m over ten years in the Pacific and Timor-Leste will be provided through the Australian Infrastructure Financing Facility for the Pacific, including an additional $50m for the establishment of a Pacific Climate Infrastructure Financing Partnership Facility.
- As previously announced, the Pacific Australia Labour Mobility scheme will be expanded to improve the benefits of the program for employers and workers, including:
- underwriting employers’ investment in upfront travel costs for seasonal workers by covering costs that cannot be recouped from workers
- improvements to workplace standards for PALM visa holders, including increased workplace compliance activities
- allowing primary visa holders on long-term placements to bring partners and children to Australia, where sponsored by employers, with additional social support, including providing relevant minimum family assistance payments, with an initial rollout of 200 families
- Expanding the existing aged care skills pilot programs for aged care workers.
- A new Pacific Engagement Visa for nationals of Pacific Island countries and Timor-Leste. Up to 3,000 additional places will be made available in addition to those provided through the existing permanent Migration Program.
Extension of Tariffs on Russian goods
The Government has extended the additional temporary tariff on goods imported from Russia and Belarus until 24 October 2023. The additional 35% tariff applies to goods produced or manufactured by Russia and Belarus shipped to Australia on or after 25 April 2022.
Note that Ukrainian goods have previously been exempted from import duty for 12 months until 4 July 2022.