Implications for investments: Mercer's October Australian Federal Budget 2022-23 analysis and insights
Summary
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Australia is once again facing economic headwinds with the lingering effects of the pandemic and its debt overhang, monetary and fiscal tightening, geopolitical issues surrounding the Ukraine and Taiwan and recent floods in the eastern states. This is leading to concerns on both national and economic security, as well as a focus on inflation and the cost of living.
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This year’s updated ‘mini-budget’ by Labor focuses on cost of living relief, targeted investments in a more robust, more resilient economy and budget repair, or servicing the cost of government debt. The cost of living and interest rates have substantially increased since the previous budget in March, whereas economic growth prospects have reduced.
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Staying the course: the Labor government has stuck to a number of policies from the Coalition government, including the stage three tax cuts and not renewing the tax offset handed out to low and middle-income earner for the last three years or the fuel excise discount. The Government will not pursue any major changes to broader tax settings, including company taxes or resource-related taxes. Labor will need to rely on the crossbench to pass its budget through the Senate if it fails to win over the Coalition.
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While the budget reflects lower projected deficits, from an investment perspective much has been priced in by the markets. Certain industry sectors may still benefit, such as those focusing on disability, aged care, health care, infrastructure, renewables and defence. The projected potential increased supply of new homes, through the “Housing Accord”, may put pressure on the residential market, although the target of 1 million new homes is “aspirational” and similar to the number of houses built in the five years prior to COVID-19.
Mercer’s Perspective – Much ado about nothing?
With the budget delivered early in the government’s first term, there is no election pressure to announce new vote-winning spending policies. The decision to release a budget in October this year rather than wait until the standard timing of mid-May next year coincides with additional concern over the health of the global economy and domestic cost of living challenges.
With the Labor government mini-budget not implementing any major overhaul in taxes, the ongoing reduction in the size of the deficit may pose a headwind to Australian GDP growth over the coming years. Recent economic data indicates that the Australian economy continues to slow but also shows resilience comparative to other developed markets. Economic uncertainty remains high as geopolitical risks continue and central banks tighten. Growth is forecast to slow down from the 3.6% in 2Q22 towards 1.5% in 2023-24.
Inflation in Australia as of August 2022 rose to 6.8% but is expected to decline to the 3.5% range by 2023-24 as the economy slows, although real wage pressure could increase, as we expect changes to workplace relations and bargaining agreements. As an example, Labor supported a 5.1% minimum wage increase earlier in June. On monetary policy, the Reserve Bank cash rate is expected to peak at 3.35% in the first half of 2023 although the RBA has now been the first major central bank to “pivot” towards a 25 bp (rather than 50 bp) increase at its recent meeting.
The budget suggests that the cost of interest payments on government debt is set to grow at about 14% a year on average over the next ten years. While the debt level is high in an historical context with net debt at 23% of GDP and expected to peak at around 29% of GDP in the medium term, it nonetheless still ranks favourably against other developed nations. Australia has a solid triple-A sovereign rating. Nevertheless, Australia needs to raise productivity levels and expand potential GDP growth so that future budgets do not rely on luck such as higher than forecast commodity prices to improve the underlying fiscal position.
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