Why we need the Stage 3 tax cuts + Budget breakdown

Hi everyone,

Back from London (and the most extraordinary experience covering the King’s Coronation) and straight into covering the Federal Budget… now that’s a contrast.

To the Budget. You would have already been awash with the coverage from mainstream media and be across the detail of what was announced. So, I’ll just provide my observations.

• Despite the $21 billion in new spending (the cost-of-living package, JobSeeker increase etc), I don’t think it will overstimulate the economy to the point of fuelling inflation and causing the Reserve Bank to lift interest rates any further.

• This year’s Budget surplus (on which I won a bottle of red wine from the Treasurer for predicting back in October) was because of what I call the “commodities slush fund”, which seriously underestimates the price of our two biggest exports… iron ore and coal. Treasury has slightly increased their assumptions for the next financial year, but it is still only slightly more than half the current market prices. A collapse in commodity prices to that extent seems unlikely so my back-of-the-envelope figures point to another possible Budget surplus next financial year.

• The other driver of this financial year’s surplus is the big increase in our personal income tax payments due to bracket creep and more people working (so low unemployment). Yes, wage increases puts more money in our pockets, but it also in turn puts more money into the hands of the Government as wage rises push us into higher tax brackets. The Government’s tax take is heading towards record levels and is the reason why the Stage 3 tax cuts must be implemented to bring back parity. More on this later.

• The economy will slow but will not go into recession and the job market will stay relatively strong. Economic growth is set to slow to 1.5 per cent over the next 12 months and unemployment to lift from the current 50 year low of 3.5 per cent to 4.25 per cent, which is still historically low.

Why the Stage 3 tax cuts must be implemented

When I quizzed both the Treasurer and Prime Minister this week on the future of the already legislated Stage 3 tax cuts next year, both said they still support them and that they were L-A-W law… we’ve heard that before.

Just this current financial year, personal income tax receipts are $300 billion and account for almost half of all tax revenue collected by Canberra. That is a huge number and is reducing the fairness of our tax system.

The Stage 3 tax cuts abolish the 37 per cent marginal tax bracket completely and lowers the 32.5 per cent marginal tax rate to 30 per cent.

The changes will also raise the threshold for the 45 per cent marginal tax rate, meaning everyone earning between $45,000 and $200,000 will pay the same 30 per cent marginal tax rate.

If you earn $50,000 a year you’ll receive a tax cut of $125. But if you earn $100,000 you will get a $1375 tax cut next year while workers earning over $200,000 will get a $9000 a year tax cut.

The housing crisis and rising property values are here to stay

As I constantly say, property values are determined by demand on supply. When demand meets supply, values are stable. When demand from homebuyers is greater than the supply of new housing the values inevitably rise.

On the supply side, this week the latest figures show new home building is at a 10-year low. And home building companies continue to collapse because their fixed price contracts are being crushed by high inflation.

On the demand side, the Federal Budget is forecasting international migration levels to hit an all-time high of 400,000 people this financial year.

In addition, property investors have withdrawn from the market because of higher interest rates. That means there is a shortage of properties to rent, as well as to buy.

The Federal Budget’s change to the build-to-rent program will go some way to addressing the rental supply shortage, but more must still be done.

Remember, the majority of rental properties (well over 80 per cent) are supplied by mum and dad investors. An incentive similar to HomeBuilder, but available only to investors, would be a quick way to address rental shortages.

The Budget also outlined a Housing Australia Future Fund to build more homes. But the construction industry challenges are more difficult. Although construction material prices are coming down, labour shortages are still an issue which hopefully the international migration program will address. Once we start to see construction prices stabilise, it will mean more normal levels of housing supply.

Sharemarket beneficiaries of Federal Budget policies

With thanks to CommSec, let’s run through the ripple effect of this week’s Federal Budget on your share investments.

Budget Measure: $14.6 billion cost-of-living relief package.

Could boost consumer spending on electronics, clothing and groceries. The measures include welfare payments for the unemployed and single parents ($1.9 billion); one-off energy bill discounts ($3 billion); cheaper prescription drugs ($1.6 billion).

The cost-of-living relief package is in addition to the previously announced reduction in childcare fees ($5 billion) and wage increases in the aged care sector ($14.1 billion).

Key sectors affected: Consumer discretionary and consumer staples stocks will benefit, like Myer, Harvey Norman, Premier Investments, Super Retail, JB Hi-Fi, Coles Supermarkets, Metcash and Woolworths.

Budget Measure: Increase in the Petroleum resources rent tax (PRRT).

The proposed increase in the PRRT is expected to generate $2.4 billion in revenue over four years. The policy, which increases the tax paid by the offshore Liquefied Natural Gas (LNG) industry, is seen as being more equitable across the industry and not impacting growth projects.

In fact, shares of LNG producers jumped over 2 per cent on Monday following the pre-release of the policy ahead of the Budget, which showed that the government has adopted more favourable-than-expected changes to the policy.

Key sectors affected: Energy, like Woodside Energy, Beach Energy and Santos.

Budget Measure: Spending on Defence following Strategic Review and AUKUS submarines deal.

Includes re-direction of savings from Defence to the AUKUS program. The recently announced $368 billion submarine deal could benefit engineering companies involved in government contracts, like shipbuilders, construction companies, education and communications providers.

The government is also set to spend $400 million to support the retention of Australian Defence Force members via a bonus for personnel who sign on for another term of employment.

Key sectors affected: ASX-listed companies Austal, Codan, DroneShield and Electro Optic Systems are key defence-orientated companies. Also, materials, ondustrials and communications companies could benefit.

Budget Measure: 15 per cent pay rise for aged care workers at a cost of $11.3 billion over four years.

Key sectors affected: Healthcare, Consumer Staples and Consumer Discretionary. Aged care providers Estia Health and Regis Healthcare shares could lift on increased spending and support for the aged care industry.

Budget Measure: Review of $120 billion infrastructure project list.

Confirmation in the Budget of scaling-back the Coalition’s sizeable infrastructure program could weigh on building materials, residential and commercial property developers.

Key sectors affected: Materials, industrials and property sectors, like Transurban, Adbri, BlueScope Steel, Boral, Brickworks, CIMIC, James Hardie, Mirvac and Stockland.

Budget Measure: Net migration target of 315,000 in 2023/24 after 400,000 increase in 2022/23.

More people mean greater demand for houses, consumer durables like fridges and everyday items like groceries. While the extra workers lift the supply of labour, they also increase the demand for goods and services.

Key sectors affected: The population boom could benefit real estate, consumer discretionary and consumer staples, which includes supermarkets and electronics retailers, such as JB Hi-Fi, Harvey Norman, Premier Investments, Metcash, Coles Supermarkets, Wesfarmers and Woolworths.

Budget Measure: Affordable housing.

Establishing a new investment fund, the Housing Australia Future Fund (HAFF), to boost the supply of, and better facilitate private investment into, social and affordable housing. Increase the National Housing Finance and Investment Corporation's liability cap by $2 billion to a total of $7.5 billion. Tax breaks to ensure more investment in build-to-rent projects. Expand eligibility for First Home Guarantee and Regional First Home Buyer Guarantee.

Key sectors affected: Industrials, materials, real estate stocks, such as Simonds Group, Mirvac, Lendlease, and Stockland. Building materials, residential and commercial property developers could be in focus alongside property-listing firms REA Group and Domain.

Budget Measure: Childcare subsidy.

Child Care Subsidy to cost $55.31 billion over four years – up $9 billion.

Key sectors affected: Consumer discretionary and education stocks like Mayfield Childcare, 3P Learning, G8 Education, Think Childcare, and Kip McGrath Education Centres.

Budget Measure: Electrification incentives for small business, low-income households and renters.

$1.3 billion in the Household Energy Upgrades Fund to incentivise energy saving upgrades for households and social housing and provides a further $310.0 million in support through the Small Business Energy Incentive.

Key sectors affected: Consumer discretionary retailers such as Breville and Shriro.

Budget Measure: $5.7 billion to strengthen Medicare including bulk billing incentives.  

Take pressure off the hospital system; primary healthcare package; GP incentives; boost number of nurses.

Key sectors affected: Healthcare stocks like Ramsay Health Care; Sonic Healthcare; Healthia and Capitol Health.

Budget Measure: $2 billion for the renewable hydrogen sector.

The government is backing the renewable hydrogen sector with $2 billion for the Hydrogen Headstart program to support large-scale projects, in a bid to “bridge the commercial gap for early projects”.

Key sectors affected: Energy and materials. Key green hydrogen producers that could benefit from the transition to green hydrogen include Fortescue Metals, Origin Energy, Global Energy Ventures, Lion Energy, Montem Resources, Province Resources and QEM.

Budget Measure: Businesses writing off assets.

The small business instant-asset write-off has been extended for the 2023-24 financial year, allowing small businesses with an annual turnover of less than $10 million to immediately deduct certain assets worth less than $20,000. New work vehicles could be a popular option for tradies.

Key sectors affected: Consumer discretionary. Could help ASX-listed car dealership and leasing groups like Eagers Automotive, Autosports Group, carsales.com, Eclipx Group and Peter Warren Automotive.

Superannuation returns ride the sharemarket wave

Markets continued their upward trajectory in April with leading superannuation research house SuperRatings estimating the median balanced option generated a return of 1.2 per cent for the month, driven by continued momentum in Australian and global equities.

As we head towards the end of the financial year, funds look to be on track to deliver strong absolute returns with an estimated 8.1 per cent return for a balanced option over the financial year to date.

The median growth option rose by an estimated 1.4 per cent over April, while the median capital stable option rose by an estimated 0.7 per cent.

Accumulation returns to April 2023

Pension returns also improved over April with the median balanced pension option rising an estimated 1.3 per cent. Similarly, the median growth pension option is estimated to rise by 1.6 per cent, while the median capital stable pension option gained an estimated 0.7 per cent over the month.

Pension returns to April 2023

New Home Loan cash back offers on the way out, but you can still find some

Australia’s largest bank CBA is discontinuing its $2,000 cashback offer from 1 June, in a further sign competition in the mortgage market is becoming too hot to handle.

Over the last two and a half months, CBA and its big bank rivals have been hiking new customer rates in addition to the standard RBA rate rises, partially reversing the discounts available to new customers.

The latest ABS figures show a record $21.22 billion worth of loans were refinanced in March, while a total of $206.86 billion worth of loans have been refinanced since the start of the rate hikes in May 2022.

Discounts and cashbacks available to refinancers have become an expensive exercise for the banks at these volumes. As a result, the number of cashback deals on offer are starting to decline.

RateCity.com.au analysis shows:

• 29 lenders are currently offering cashback deals, with the majority available to refinancers only.

• The highest cashback is $10,000 from Reduce Home Loans, however this is for a loan size of $2 million or more and not available on the lender’s lowest rate.

• All four big banks currently offer cashback:

  • CBA’s $2000 offer ends this month.

  • Westpac currently offers $3,500 for refinancers.

  • NAB offers $2,000 for refinancers.

  • ANZ offers up to $4,000 for refinancers and $3,000 for first home buyers.

Over 70 per cent of mortgages sit with the big four banks, yet there are over 100 different lenders in the market, keeping the pressure on the biggest players.

Current cashback deals on the RateCity.com.au database: