| An Election Budget – the Australian Federal Government Budget 2021 Click here to see Full Budget Federal Treasurer Josh Frydenberg handed down the 2021 Budget in what can best be described as a pre-election budget for the ages. Absent the surprise tax cuts, and with the Reserve Bank of Australia locking in near 0% interest rates for at least the next few years, Frydenberg and the Coalition were able to deliver a huge and very much big spending Labor-like budget which will very much frustrate the opposition leading into what could be a surprise early election year. The deficit for 2020-21 at $161 billion is almost $53 billion better than forecast in last year’s delayed 6th October Budget. Whilst the forward estimates have the deficit falling again next year, deficits are predicted to continue for the next decade, which is a far contrast to the Coalition’s usual stance of fiscal responsibility. It’s also worth noting that the federal government net debt will peak at almost $1 trillion by 2024-25, a very big number, but something that’s likely to be glossed over in the context of very low rates, central bank money printing, and the much larger indebtedness of other developed countries. Key areas of focus were tax cuts, Covid-19 measures, job creation, aged care, mental health, childcare, national disability insurance scheme, and infrastructure. The Winners included: Business – loss carry-back provisions and full expensing of assets at a cost of $20.7bn Aged Care – sector gets a $17.7bn funding boost over 4 years Low and middle income earners – up to 10 million will receive another tax offset of up to $1,080 or $2,160 for couples in their refunds National Disability Insurance Scheme – an extra $13.2bn over 4 years, but reform needed as spending is out of control with 100,000 new to the scheme in 2020 alone First Home Buyers – increased cap in savings for first home deposit Parents – families with 2 or more children under 5 will receive subsidies of up to 95% of their child care costs Infrastructure & Construction – another $10bn over 10 years added to existing infrastructure plans Mental Health – $2.3bn over 4 years to boost services Covid-19 – $3bn of additional measures on top of the $25bn spent last year The Losers include: Overseas travellers – international borders won’t re-open until mid-2022, but could be later Tourism industry- no additional support from the $1.2bn already provided Climate – given the global pressure to lift our efforts to combat climate change Future generations & the Australian tax-payer – who will likely foot the bill for the deficits and the debt Our neighbours – foreign aid will decline by 10.5% and then continue sliding Universities – no extra funding whilst foreign students remain stuck overseas Given the better than expected economic recovery we’ve seen, the size of the budget does seem rather unnecessary with more than a hint of profligacy. However, with the Reserve Bank of Australia running out of policy ammunition and with interest rates anchored at low levels for some time, you could mount a more than ample argument that there’s never been a better time to shake the money tree. Rather than push through real reforms to the supply side of the economy in order to stem multi-decade falling productivity growth, Frydenberg and the Coalition have decided to go with big government and the assumption that Australia will be able to grow their way out of the rather large multi-year deficits and the large debt pile we’ve now racked up. Rapidly recovering employment, sky-high iron ore prices, surging house prices, high household savings rates, record highs in consumer and business confidence, and now a monster budget, will likely see the economy experience a stimulus-fuelled mini-boom in the next couple of years. However, we still need to work through lockdown trigger-happy state premiers, vaccine supply issues and safety concerns (largely unfounded), international border closures at least until the middle of 2022 (likely the end of 2022), and little to no immigration for the next few years. Market implications It’s always tough to directly translate a budget into potential market movements unless that budget pays very specific attention to certain industries. This budget wasn’t one of those. But generally, any big spending deficit budget is negative for bonds, positive Aussie dollar, positive property and infrastructure, and positive for the cyclical / economically sensitive stocks/sectors of the equity market. Was the spending in this budget, whilst overly large, enough to move the dial on those types of market movements? Likely not. But it is likely enough to provide continued support to an already well supported equity market in the period ahead. By Chris Lioutas – PSK Chief Investment Officer |