Wayne Swan delivered his sixth budget last night, and it wasn’t pretty. From a predicted budget surplus of $1.1 billion, the government is now forecasting a budget deficit of $19.4 billion. Hit by falling revenues of $60 billion over four years, and billions in new spending on disability insurance, education and infrastructure, it was always going to be tough budget.
The budget has a mix of good and bad news for investors who own companies impacted by the government’s changes.
Construction companies that were facing slowdowns in the face of the fading resources boom could see some relief, with $24 billion in infrastructure spending around the country.
Retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings (ASX: HVN) will likely be hit by the scrapping of the baby bonus as well as the cancellation of an increase in Family Tax Benefit. Much of the $5,000 baby bonus payments were anecdotally spent on items like new TVs, white goods, and luxury items, as well as everyday food stuffs. Instead, the government will replace the baby bonus with a less generous increase to Family Tax Benefit – Part A, which will be means-tested.
Big miners will be hit by tighter rules around exploration tax deductions, which means miners will only be able to claim a smaller portion of their expenses on tax. Instead of claiming immediate deductions, miners will have to write some exploration costs off over five years. The new rules are unlikely to penalise junior miners and exploration companies.
Wealthy investors and large super funds will be hit by dividend washing changes. Dividend washing is where foreign investors sell their franking credits to domestic investors. Of course the dividend washing transaction needs to be arranged by a prime broker, such as Macquarie Group (ASX: MQG), who line up foreign investors who can’t use the franking credits. The main beneficiaries of this are superannuation funds, not-for-profit funds and wealthy investors, with the big four banks and Telstra Corporation (ASX: TLS) popular dividend washing stocks. Retail investors are virtually locked out, as they don’t have access to prime brokers.
Renewables companies may take a hit after funding for the Australian Renewable Energy Agency were deferred, as well as hits to the biodiversity fund and the Clean Technology program.
The biggest issue is: Will the Labor government be able to implement any of these changes before the election? Judging by current polls and expert opinion, the Coalition is expected to win the September election hands-down, which then puts into question, what will they do with Labor’s proposals?
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