The Morrison Government Budget announcement has been delivered, proving they are prepared to throw a lot of money at trying to secure your vote for the upcoming election.
The government’s response to higher cost of living pressures, including the record fuel prices and growing housing, grocery, and medical costs is to hand out short term cash and incentives amongst other things.
While many are criticising the budget as short sighted, this blog provides a summary of the top takeaways from the announcement and what the Budget could mean for you and your Financial Plan.
Cost of living pressures
The government has been promising “targeted and proportionate” support to ease the burden of what they say is “the one topic sitting at the forefront of most Australians minds: The soaring cost of living.” Within the Budget announcement included three things addressing this matter; a fuel excise cut; a one-off payment for welfare recipients; and an income tax cut.
- The anticipated fuel excise cut (being a flat petrol tax), will be halved as of 30th of March, from 44.2c per litre to 22.1c per litre. This measure is set to last the duration of six months, costing the government a total of $3bn. Whilst this is a notable takeaway from the Budget announcement, it has also been received by some as a bad economic policy, in the way that it could prove to be difficult to reverse in the circumstances in which oil prices remain high or continue to increase.
- Recipients of a range of government payments can expect a one-off payment of $250 come April. Eligible recipients include people on the Disability support payment, Age Pension, Jobseeker Payment, Parenting Payment, and Youth Allowance.
- The portion of Australians earning under $126,000 p.a. will be receiving a one-off tax cut of $420 upon filing their tax returns after 1 July, although there is a catch which is of importance to highlight. If you earn below the tax-free threshold of $18,200 and pay no tax, you will not receive the $420.
Infrastructure and investment projects
Infrastructure announcements from the Federal Government before the election were not a rare sight, with the National party securing major infrastructure projects in exchange for commitment to net-zero targets. A total of $18 billion more in infrastructure spending has been added to the $120 billion pipeline of projects that are underway. Most notably for Victoria, a $3.1 billion commitment to the Melbourne Intermodal Terminal has been announced, although two-thirds of the package was announced last year. The largest single project that has been announced is the commitment to faster rail in between Newcastle and Sydney.
Australia’s Debt Position
Based on the government’s modelling, their budgeted commitment to more spending, without raising taxes in any way, means net debt as a percentage of GDP is only expected to increase from 27.6% in 2021-22 to 33.1% in 2025-26 (Aus. Gov). Debt levels in Australia have skyrocketed post covid already, though comparing Australia globally, we have relatively low levels of debt.
There is also another $16 billion set aside for “decisions taken but not yet announced” that could put the economy at risk of being overstimulated. This could put pressure on inflation and on the RBA in turn who would have to increase interest rates further. The Government’s spending confidence is thanks to the unemployment rate and commodity prices.
Unemployment has fallen to historical lows, so less will need to be spent on social service payments. Commodity prices are higher than expected which means tax dollars are coming in faster. Especially Iron Ore. Rising tax revenue from an economy that is roaring back from the pits of Covid is assumed to do most of the budget heavy lifting from 2026 as we seek to reduce the deficit.
Whilst the Treasurer has outlined why this is in their view not the time for austerity measures, there are assumptions made that debt will begin to go down by 2025-26 that are not rock solid, such as commodity prices and employment. This could result in future generations having to make difficult decisions over spending.
Investments in small businesses, their people, and technology
In last year’s Federal Budget, a program was implemented to help both small business and jobseekers. This was a wage subsidy up to $10,000 for new employees aged between 15 to 24 or those over 50 to ensure they were not locked out of the jobs market long-term whilst also assisting businesses when hiring new staff.
Ongoing support for businesses and employees will be extended with the Government committing to a $120 tax deduction for every $100 spent on digital technologies and training their staff. This is up to a maximum of $100,000 and for businesses with a turnover of less than $50 million. These deductions can be applied to investments made in “cloud computing, cyber security, accounting and e-invoicing software and web page design”. External training courses will also be included in this pool which will boost the skills of employees and incentivise businesses to invest more in their people’s skills. As a tight labour market continues to cause issues, businesses need to retain staff and investing in them within the business is a great way to do this.
There are minimal changes to superannuation in this budget, but what has been announced should be considered by any retiree or those who are close to retirement age. The minimum drawdown requirements for account-based pensions have been kept at the frozen rate of 50% lower than usual. Retirees must draw down on their super to a certain level each year in order to enjoy the tax-free structure of super.
This was announced at the start of the pandemic to help retirees preserve and manage their super and retirement savings. Other than this, there are no changes to how superannuation is taxed this Budget.
Assistance for first home buyers
In order to assist first home buyers; single parents; and regional Australian’s; the Federal Budget has expanded the First Home Loan Deposit Scheme, originally put forward by the Coalition in 2019. This scheme was proposed to provide individuals with the opportunity to jump into the housing market earlier, with as little as a 5 per cent deposit to secure a home loan and without paying lenders mortgage insurance (LMI), as the Government acts as guarantor.
Previously set to end June 2022, the program has been extended for another three years, with 50,000 available places spread across three guarantees with separate eligibility requirements.
Outline and eligibility requirements of each guarantee:
- 35,000 places for the First Home Guarantee (formerly known as the First Home Loan Deposit Scheme) which is available for first home buyers to purchase a home with a 5 per cent deposit. Single applicants must be earning less than $125,000 per year to be considered, or $200,00 for couples. The prospective home must also be valued under the area-based caps.
- 10,000 places for the Regional Home Guarantee. This is a new program available from October 1st, 2022 set to support home buyers (including non-first) to purchase or build a new home in regional locations. A minimum of a 5 per cent deposit is required.
- 5,000 places for the Family Home Guarantee which is a scheme proposed to support and encourage single parents to purchase property with as little as a 2 per cent deposit. To be eligible, the home in question must fall under the property price cap which is dependent on your area.
Whilst these Government programs aim to support and assist first home buyers, it’s important to understand the implications as well. The housing measures continue to place focus on demand as opposed to supply, which inevitably puts upward pressure on property prices and raises debt levels for Australian’s.
This year, the Budget has endeavoured to address issues raised and pressures faced by the community, however, has come up short in some areas. It’s clear this is truly a pre-election fiscal plan, with hopes that the Budget will solidify the Coalition’s position ahead of the election period.
Yield Financial Planning is Here to Help
Here at Yield, we prioritise our ability to keep our client’s aware and adaptable to these amendments and how they are relevant to their personal financial situation. Ensuring we continue to place you in the most optimised position possible.