The Aussie budget – reading between the lines

15 May, 2017

Categories: Economy News, Investment Commentary, News

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Government budgets tend to be long, complicated and dense. However, they also lay out important economic infrastructure that will influence investment growth for the year to come. Here’s what I think are important announcements from the Australian Federal Budget for the next 12 months.

Targeting banks

Against the backdrop of widespread dismay at bank behaviour and popular calls for a Royal Commission into the sector, the biggest banks must now pay a new A$1.8bn p.a. levy. This is pitched as a charge for being ‘too big to fail’.

Credit cards impacted by Aussie budget Milford Asset Management

Banks are the target of some of the latest budget measures.

However, given banks have to also run safer balance sheets, it seems likely most of the levy will be passed on to customers via higher interest rates. Early estimates suggest a rise of 0.10 per cent for owner-occupiers, 0.25 per cent for investors and even more for interest-only loans would even things out.

The consumer loses

From 2019 the Medicare levy will rise, effectively lifting income tax for everyone by 0.5% (slightly offset by the expiry of the budget repair levy on high incomes). Together with higher university fees and interest rates (see above), the mortgage-heavy consumer is likely to come under more pressure when retail sales growth is already falling.

First home buyers over investors

Superannuation allowances have been tweaked to assist first home buyers in saving and to encourage empty nesters to downsize, freeing up family homes. At the same time, property investors will have some tax deductions removed and foreign investors are to be discouraged even more with higher capital gains taxes, a 50 per cent cap on the proportion of new developments that can be sold offshore and a (small) annual charge on vacant investment properties.

Investing in the future

The budget contained a $75b infrastructure package to be spread over 10 years, including Sydney’s second airport and the Melbourne to Brisbane rail line. However, many of the ‘big ticket’ projects were previously announced and it’s unclear how much new spending is involved.

Nevertheless, as the housing market’s investment growth fades it underlines the role civil infrastructure will play as Australia’s next big growth driver.

AAA rating a high priority

The forecast return to budget surpluses from 2020/21 continues to be based on economic assumptions generously described as ‘optimistic’, especially those calling for a strong lift in wage growth and a reversal of recent increases in unemployment. The deficit forecast for 2019/20 has reduced despite larger shortfalls in each of the prior two years, reinforcing the view that retaining the coveted AAA debt rating is a high priority.

Pulling it all together, this was a budget characterised by strong populist themes, the side-stepping of comprehensive reform and the replacement of ‘zombie’ spending cuts that failed to pass the Senate with easier to support tax and levy increases. A cynic might say it’s a realistic budget, acknowledging the Coalition government’s tenuous position in the polls.

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Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.

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