12/10/2020

Marketwatch Federal Budget wrap

Federal Budget 2020

Armed with a decent red and a plate of grilled salmon and asparagus, Marketwatch has had a most enjoyable time attending a webinar held by the inestimable Bill Evans, the chief economist for Westpac Bank Ltd. Bill has an international reputation and is one of the greats of the economic world both here and overseas. I will share some of his insights later in this piece.

The contents of a national budget used to be shrouded in secrecy and guarded by mysterious priests in long robes casting deadly spells. Nowadays, it’s a bit like having Christmas on December 20th. Some of the contents are already known. But nevertheless, let’s recap the key messages.

Personal income tax

  • Stage 2 income tax cuts planned for 2021 have been brought forward and backdated to 1 July 2020. A comparison of the tax levels is:
Existing threshold New threshold Tax rate above threshold
$18,000 $18,000 19.0%
$37,000 $45,000 32.5%
$90,000 $120,000 37.0%
$180,000 $180,000 45.0%
  • Stage 3 tax cuts, affecting higher income earners remains a work-in-progress and is more politically contentious so that one is left until later.
  • Extension of the low and middle income offset available to those earning under $90,000 pa. $2,700 for singles and $5,500 for dual income families.
  • Additional payments for pensioners and carers.

Business

Temporary instant asset write off for all businesses with a turnover of up to $5 billion. This covers all small businesses as well.

Temporary loss carry-back for businesses with a turnover of up to $5 billion including all small business. Losses incurred up to 30 June 2022 can be offset against previous profits made since the 2018-19 tax year. The offset can be taken as a tax refund.

For small and medium size businesses, the refundable Research & Development tax offset cap on annual cash refunds is removed. The intensity test will be streamlined and the non-refundable tax offset increased for large businesses.

Employment policy

  • The JobMaker allowance for businesses. $200 per week for newly hired 16-29 year olds, $100 per week for 30-35 year old. There is no payment for hiring old codgers like Marketwatch.
  • A JobTrainer allowance with an apprenticeship wage subsidy and access to 340,000 training places on free or low cost courses to boost skills.
  • JobKeeper support reduced and set to expire from March. No extension noted.
  • JobSeeker supplement has already been reduced to $500 and will be phased out after December 31. No extension is noted.

There are concerns that the removal of JobKeeper and JobSeeker will impact negatively on the hospitality, tourism and other related sectors. The feeling is that the government must revisit this one as a matter of urgency.

Infrastructure policy

  • States and Territories allocated $2.5 billion on a “use it or lose it” basis. Essentially this means that spending needs to be on quickly achievable projects. If you are waiting for, say, environmental approvals, it’s probably best not to bother.
  • Roads and safety upgrades $3 billion
  • National Water Grid $0.2 billion.

Industry policy

  • Modern manufacturing strategy. Government to co-invest in six sectors; defence, space, food and beverages, recycling and clean energy, medical products, and resources and critical minerals processing.
  • Removing red tape for exporters through digital services and simplified systems.
  • Energy policy allocation of $250 million for three electricity transmission projects.
  • HomeBuilder grants of $25,000 set to phase out in December.

A few comments.

Well, naturally, this is going to cost a lot of money. Treasury forecasts of deficits for the next few years are:

2020-21              $213.7 billion

2021-22              $112.0 billion

2022-23              $  87.9 billion

2023-24              $  66.9 billion

Those deficits will need to be financed by borrowings and during this period our indebtedness is set to rise to about 44% of GDP. As you can see, this is a long way from where we have been but comparatively is a lot less than most other Western countries. Because of low interest rates, the interest payable on that debt (the red line) remains relatively benign.

Debt Cahrt
Debt Cahrt

 

The key message is, gosh yes, it is a lot of debt but it is manageable.

Employment appears to be a bugbear for some time, hence the need to revisit the Jobseeker allowance. The effective employment rate, which adds the number of registered unemployed people to those who left the workforce post-COVID, and those who work zero hours for economic reasons hit about 15% in July and has now abated to about 10%. But it is still forecast to be about 8.5% in two years’ time. “Mainstream” unemployment as measured by the Australian Bureau of Statistics is predicted to remain at about 6.5%-7% for the same period. Now you will all be aware of Marketwatch’s views about forecasting, but these are not nice numbers and even if you allow a generous pinch of salt, they still are not pretty.

The overall impression of this budget is that it is a pretty good efforts. Some months ago we talked about the difference between monetary policy (Reserve Bank) and Fiscal Policy (Government actions). At that time the feeling was that the Federal Government needed to do more as the Reserve Bank cannot do all the heavy lifting. Well, this budget goes a long way to redressing that balance. The Treasury forecasts of growth are pretty bullish because the expectation is that businesses will invest because of the asset write off provisions. The jury will be out for a while on that one.

Marketwatch also spent some time in a discussion on the housing market, a subject which he touched on with you very recently. This is subject worth revisiting in the next couple of months.

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