I have been accused, at various times, of ‘shilling for the government’ and of ‘being a Labor stooge’.
Which means, on one reading, that absolutely nobody likes me at all!
That’s the cost of trying to be impartial, I guess — and a reminder that social media thrives on confirmation bias and tends not to reward nuance.
Of course, on another reading, I hope that most of my readers consider that a good sign.
If I’m annoying the one-eyed supporters on both sides, I like to think that means I’m not slavishly swallowing the PR spin of either party.
It’s not my judgement to make, of course — that falls to you, dear reader.
I’ll go on trying to call it as I see it, though, focussing on the policy and eschewing the politics.
Which is all a preamble to warn you that I’m about to step into the fray on the most politically charged event outside an election campaign — last night’s Federal Budget.
Budgets are never perfect.
They are, by construction, a compromise.
The electorate wants more stuff, but wants to pay less for it.
Or, often, they want someone else to pay for it.
With (at least, theoretically) constraints on how much debt a government can responsibly run, that means not everyone is going to be happy.
And it’s an exercise in painting yourself as the best option, come the next election.
I wrote yesterday about what I wanted to see from the Budget, meaning I’d already nailed my policy colours to the Budget mast.
So let’s run through the biggest bits.
First, the retention of the Low and Middle Income Tax Offset is a great move. It’s not cheap, but it’s well structured.
Unlike a reduction in the tax rate, which goes to every tax-payer who earns that amount or above, a ‘tax offset’ is only applied to those whose total income is below a certain threshold, saving the budget money, and putting the money that is spent in the hands of the right people.
Those people are more likely to spend it than save it, delivering some social benefits to that group, and economic benefits to all of us. It’s a very efficient way to put taxpayers’ money into the economy.
Next — and my favourite purely from a financial advice perspective — is the decision to pay every worker Super, no matter how much they earn. Previously, and inexplicably, an employer didn’t have to contribute Super if they paid you less than $450 per month.
Frankly, I’m not sure what the rationale was, but it was a terrible policy. Many, many more Australians will retire with more Super as a result of the change, and that’s a wonderful thing!
Last in the ‘great’ category is the money being put toward paying 95% of childcare costs for the second and subsequent kids in a family. A terrific way to do three things: give families (and let’s be frank, usually women) the financial support to rejoin the workforce, improve the workforce participation rate, and give kids access to early learning opportunities.
If I have a criticism, it’s that we know the importance of ‘early childhood education’, but this is being referred to as ‘childcare’. I’d like to see the focus on the former, in both the description, but also in the implementation of the funding. We owe the next generation a strong start in life.
Those are the — to my mind, anyway — unquestionably good parts of the Budget.
There’s also things like infrastructure spending ($10b on roads, for example), that’s welcome, if unremarkable, but worth mentioning at this point.
Let’s go to the not-bad-but-not-obviously-great stuff.
The $10b being put into aged care is overdue and badly needed, as we know from the recent Royal Commission. Except that the Royal Commission recommendations would cost closer to $18b. So this one is ‘better, but probably not good enough’.
Ditto the support to get single parents into the housing market. The government is going to guarantee their deposit, so that single parents will only need a 2% deposit. Which is great — but doesn’t actually fix the high house prices themselves, and arguably only adds demand to the market… which, on balance, is just likely to push prices even higher.
The extension of the instant tax write-off of assets for businesses with turnover under $5 billion is also pretty good. It’s a stimulus measure designed to keep businesses spending, and to turbocharge the speed of the deduction, lowering tax bills and keeping more money in the till. That’s good for both those who’ll benefit from the spending, and the business getting the deduction.
At the end of the day, though, this is just a change in timing (instead of getting 20% of the benefit over each of the next 5 years, they’ll get it all in one year), so it won’t cost the Budget much, and is a pretty easy one. Of course, like all sugar hits, either the government needs to keep feeding the sugar (extending the tax break year after year) or it’ll hit a ‘spending hole’ where businesses will drag forward their spending, leaving a big gap if/when the deduction is taken away. (It’s like when Coke is on special at Woolies — you grab twice as much now, then sales fall away to almost nothing when the price goes back up).
Last in this category is the concessional taxation for biotech innovation. The government is going to apply a tax rate of 17% for profits in this area (lower than the 25% for small and medium businesses and 30% for larger companies).
Now, I like innovation as much as (maybe more than) most, but lower tax rates make little sense as a policy tool in this one.
See, if you make a loss on the innovation, the tax break doesn’t help. And if you make a profit, the profit itself is the motivation!
If I make $100 million from some new drug, whether I pay 25% tax or 17% tax has a financial implication, but it’s not like I’m going to not bother making $100 million if the tax is kept at 25%!
If you’re going to support innovation, it seems sensible to me that you do it on the basis of the money invested in the innovation’s development (the spending), not a concessional tax rate when they’ve already hit the jackpot.
And the Budget-bad?
The good news, economically (and befitting a pre-election budget!) is that this is a ‘something for almost everyone’ budget.
But not everyone.
There was precious little in either funding for the environment, or if you just care about the money, in policy certainty for energy investment.
University funding (inexplicably) falls.
There was no step-up in welfare payments (again, like the environment, something that I think is worthwhile for its own sake, but even if you disagree, an increase in welfare payments — as in the case of the extension of the Low and Middle Income Tax Offset — would have almost certainly been spent, providing a permanent uplift for the economy.)
The government put money aside for a reduction in some alcohol taxation for microbrewers, and some industry support for video game manufacturers.
If you’re in those industries, you’re pretty happy, but the rationale seems hard to pin down.
Why do those industries, in particular, need support?
What’s the business case for giving them more than other industries?
I mean, I like a beer and a computer game as much as the next bloke, but I’m not sure why they — to the exclusion of others — need support.
And then there’s the elephant in the room.
Actually, 1.2 trillion elephants.
That — in dollars, not elephants — is the expected level of government debt at the end of the budget forecast period.
The government gave no program, no timeline and no guidance as to how and when the Budget would be returned to surplus, and efforts made to chip away at the debt.
That’s a remarkable change in rhetoric, and — I think — an abrogation of its responsibilities. (I will, too, be looking to Opposition leader Anthony Albanese’s Budget Reply speech tomorrow night, and will apply the same standard there, too.)
Unemployment — according to both Treasury and the RBA — will be under 5% at year’s end.
Economic growth will be more than 4.5% this year.
We’re not out of the woods — and there are some sectors still hurting badly — but we’re getting back to some sort of normal.
It should be reasonable to ask — and to expect — the government (and opposition) to have started making inroads in government debt at some point in the next three to five years.
That they haven’t is a huge missed opportunity and a big economic risk.
Lastly, it’s worth remembering that the whole thing is predicated on high iron demand. A lot hinges on whether China wants to — or can — make Australia hurt when it comes to our largest export commodity and market.
There’s more risk there than almost anyone is talking about.
(But encouragingly, the Budget takes a very realistic view that iron ore prices will tumble from the current level of over $200/tonne to just $55/tonne by March of next year. Kudos to the Treasury boffins and to the Treasurer for not overruling them.)
Phew… that’s a lot.
I hope you didn’t mind indulging me for a slightly longer article this time around — there was a lot in the budget to digest and explain, and I’ve done my best to do it justice.
So after all that, what’s the bottom line?
This was a very unCoalition budget. It was big spending, and there was precious little attention given to the ‘debt and deficit’ rhetoric that characterised earlier Budgets. Kindly, that’s because of COVID and its after-effects. Less kindly, that’s because there’s an election due soon.
It’s a Budget that’s hard to love — the government ducked the big economic and social challenges — but also hard to hate — they were reasonably fair and generous in many areas, even if imperfectly.
For investors, there’s similarly nothing to love or hate.
Ongoing stimulus is probably good for economic growth and profitability.
But wage growth is predicted to stay pretty flat for years, meaning spending growth will be consequently hard to come by.
Biotechs may get a leg up from the tax breaks (but drug discovery and development remains a low-probability bet, so I wouldn’t invest differently as a result).
Travel company shareholders won’t love the Budget assumption that international borders stay closed for another 12 months.
Aged care companies will get a boost from the extra funding (but will also have additional care obligations).
Energy shareholders have no additional certainty.
This is a budget that shores up short term economic activity, while simultaneously kicking a couple of cans down the road.
But I won’t be investing any differently — quality companies will remain the order of the day.