Following the pattern of the last few Federal Budget announcements, “Budget night” contained little by way of surprises, with many of the spending initiatives and broad Budget position known in the weeks and days leading up to the official release. Promoted as the “Stronger foundations for a better future” Budget, Labor continued to promote its theme of spending restraint and responsible economic management – with a key focus on targeted cost-of-living relief, the transition to renewable energy, and bolstering targeted spending on Medicare and the care sectors.
The superannuation related proposals were limited, and primarily confirmed proposals announced earlier.
Economic update
The (somewhat) unexpected surplus
The backdrop to this year’s Federal Budget has become increasingly murky – the global economy is facing elevated recession risk, China is in the process of reopening after a long COVID lockdown and the Reserve Bank of Australia has raised rates significantly in an attempt to bring down inflation.
Nevertheless, the 2022/2023 Financial Year (FY23) is on track to mark the first Federal budget surplus since 2008 – and will make Treasurer Jim Chalmers the first Labor Treasurer since Paul Keating in 1989 to deliver a surplus. We believe that the Australian economy will avoid recession risk this year, but is set to see growth slow significantly through 2023. The economy has proved quite resilient to the shocks to date and the labour market has been very strong, however the dynamics around the labour market are slowing, with migration increasing and demand waning.
Budget themes
The bottom line of this year’s Federal Budget is that it continues with the theme of fiscal or ‘spending’ restraint, with the Government saving (rather than spending) the bulk of the additional revenue it received.
There are a number of cost-of-living measures that have been proposed, which will provide more purchasing power to some households. On the face of it, this would be considered an inflationary move – but the impact on household finances from mortgage rate increases this year will likely more than offset these measures.
The Government also announced additional measures to support the transition to renewable energy, cybersecurity and the aged and health care systems.
Economic Outlook
Given the resilience of the economy over the last six months, and elevated commodity prices, the budget bottom line has improved significantly. Very strong employment has led to much better personal income tax receipts, and corporate tax receipts have been better than expected.
Turning to the forecasts, Treasury are aligned with our view that economic growth is going to slow over the forecast period. Gross Domestic Product (GDP) growth is expected to fall to 1.5% in FY24 and then hold close to trend growth of 2.5% in the following two years.
There is alignment with the RBA view that the labour market is set to cool, although the Budget assumes a slower ‘cooling’ than the RBA, which seems a bit ambitious in our opinion. Given the challenging global context, like most forecasters, Treasury’s forecasts for wage growth over the last ten years have not aligned well with actual wage growth. With that caveat in mind though, wage growth forecasts have been upgraded in the very near term relative to the October 2022 forecasts (to 4% in FY23), with wage growth moderating to 3.25% over the coming two years. This level of wage growth is consistent with the RBA’s inflation target range, assuming productivity sees some improvement over the forecast horizon.
Fiscal Outlook - Back in black, but not for long
The Federal Budget surplus is anticipated to be short lived – with the Federal Budget expected to be back in deficit next year (as shown in the chart below). There are a couple of dynamics to this – firstly, the expected increase in the unemployment rate has the effect of reducing personal income tax receipts and also increasing unemployment benefit payments. Secondly, there are some structural spending increases over coming years, including expenditure related to the National Disability Insurance Scheme (NDIS) and aged care – although, on the former it should be noted that the expected growth in NDIS expenditure was reduced in this Federal Budget.
Source: Refinitiv Datastream, Australian Treasury May 2023 Budget. Dots represent budget forecasts
At this point it’s also worth discussing the stage three personal income tax cuts, that are still set to come into effect in FY25. Whilst there has been a lot of speculation that these tax provisions will eventually be altered to drop these cuts, we believe that the Government will not pursue such changes. Firstly, the stage three personal income tax cuts are already fully costed and in the Federal Budget – so they are very much the ‘status quo’ of future fiscal policy. Secondly, and more importantly, it is politically expedient to keep their election promise of not changing these tax cuts – and the political calendar will provide a keen reminder, given the next election will come not long after the planned implementation of the changes.
Despite going back into deficit next year, the size of future deficits is lower than those that were anticipated in the October 2022 forecasts, which is a positive. Net debt is now expected to peak at 24.1% of GDP in FY27, rather than 28.5% of GDP in the October 2022 forecast. This provides the Government with the fiscal space to provide more support should the economy experience a downturn, but also bolsters the support for Australia’s AAA credit rating. Additionally, interest expenses have become less onerous with the decline in longer-dated government bond yields since the start of the year. In October 2022, net interest payments were expected to peak at 1% of GDP – that is now 0.8% of GDP. This change can be seen in the chart below, with the grey line showing government bond yields today and the blue line showing where they were at the end of 2022.
Source: Refinitiv Datastream, 8th May
Implications for asset classes and portfolios
One of the considerations of the Federal Budget is the extent to which the cost-of-living measures contribute to inflationary pressure in Australia. Whilst our base case is that the impacts should be fairly minimal, and we would note that the fiscal impulse (i.e the change in the stance of fiscal policy) is less than 1% of GDP, there is the risk that it could lead to increased pressure on the RBA to further increase interest rates. This would likely be a negative for the equity market and the shorter-dated government bonds, given the market is pricing interest rate cuts by the end of the year.
It would, however, be a positive for the Australian dollar as it would reduce the interest rate differential between Australia and the rest of the world, notably the US.
Whilst we are conscious of that risk, our portfolios are well positioned for that outcome, should it occur, given we are largely positioned for slowing growth, the potential for more equity market volatility, and a small preference for government bonds. More generally though, we expect that global developments and monetary policy are going to play a much bigger role in the evolution of markets than the reverberations of this Federal Budget.
Superannuation update
Additional tax for super balances over $3 million
The Treasurer confirmed the Government’s intention that, under their previously announced “Better Targeted Superannuation Concessions”, investment earnings on a person’s total super balances over $3 million would be subject to a tax rate of 30% from 1 July 2025 (currently 15%). It will not limit the amount an individual can actually hold in the accumulation phase of superannuation.
The new tax is to be administered by the ATO, using a similar approach to Division 293 tax (an additional tax on concessional contributions for people with income of more than $250,000 per annum). The intention is that this will minimise reporting and compliance costs for super funds.
The Federal Budget Papers indicate that this is expected to impact 80,000 people (0.5% of individuals with a superannuation account) in FY26 and to raise an additional $2.3 billion in FY28, the first full year of receipts collection.
Affected individuals will be able to choose to pay the extra tax directly, or by releasing amounts from one or more of their superannuation balances, consistent with the approach taken for excess contributions tax and Division 293 tax.
In relation to defined benefit interests, the Government states that it intends for broadly commensurate treatment to apply. While a range of possible approaches have been suggested, it is not clear exactly how the tax will be applied to defined benefits.
Consultation has closed on this, and we now await the release of draft legislation for full details on how it will be applied. There may even be changes made, as a result of the consultation.
We note that this increased tax rate on total super balances over $3 million is not set to commence until after the next Federal election and the Opposition has signalled its intention to repeal the legislation, if elected. Also, there has been some criticism that the $3 million threshold won’t be indexed, and it will be open for a future government to amend the legislation at any time to increase or index the threshold.
Move to payday super
In the week leading into the Federal Budget the Government announced that employers will be required to pay their employees’ Superannuation Guarantee (SG) entitlements at the same time salary and wages are paid. Currently employers are only required to pay SG on a quarterly basis. Treasury previously estimated around 56% of micro businesses and 30% of all small-to-medium businesses currently pay quarterly, often to help with cash flow.
The change was a recommendation of a recent Senate inquiry on underpayment of remuneration.
Requiring employers to pay super more frequently is expected to have a marginally positive impact on members’ balances at retirement, due to super being invested for longer. Perhaps more importantly, payday super should make it easier for employees to keep track of payments and reduce the chance of there being unpaid super, should their employer’s business collapse.
This change is effective 1 July 2026, allowing time for employers, super funds, payroll providers and other stakeholders to prepare for the change. The ATO is expected to consult with industry, including employers, in the second half of 2023.
Renewed push to chase unpaid super
Under its Securing Australians’ Superannuation Package, the Government will set public targets for the ATO on recovering billions in unpaid super, whereby the ATO will be required to report annually against the new targets. The ATO estimated that $3.4 billion in super payments went unpaid in FY20. The Package also includes additional funding to strengthen the ATO’s ability to detect SG non-compliance, by enhancing data matching capabilities that will allow the ATO to act sooner on SG underpayment.
The proposed changes to payday super (see section above) will also improve the ability of the ATO to detect when SG has not been paid.
This change is expected to benefit younger workers and women in particular, who are more likely to be in casual and insecure work arrangements, which are more prone to SG underpayment.
Separately, the Government announced funding to enable the ATO to engage more effectively with businesses to address the growth of tax and superannuation liabilities.
Funding to continue for superannuation consumer advocate
The Federal Budget confirmed $5million in additional funding over 5 years from FY24 to continue the superannuation consumer advocate’s work to improve members’ outcomes. This measure will be funded via an increase in the Levy administered by the Australian Prudential Regulation Authority (APRA).
Increased Rent Assistance and Other Changes from 1 July 2023
The Government announced that it will increase the maximum rates of the Commonwealth Rent Assistance allowances by 15 per cent, from September 2023, to help address rental affordability challenges. This increase is expected to impact around 1.1 million households, a material portion of whom are retirees who do not own their own homes.
As no amendments were announced in the Federal Budget, the following important changes will occur as scheduled from 1 July 2023:
- The Superannuation Guarantee rate will increase from 10.5% to 11% (and is legislated to increase again on 1 July 2024 to 11.5% and then to 12% from 1 July 2025); and
- The temporary reduction in account-based pension minimum drawdown percentages will end.
The ATO recently released details of the various thresholds that will apply for FY24.
Of note is that the general Transfer Balance Cap (the maximum a person can transfer to a tax-free pension product) will increase from $1.7 million to $1.9 million. It is indexed to the Consumer Price Index (CPI) and the CPI increase of 7.8% over the year to December 2022 resulted in a jump in this cap.
The contribution caps will remain unchanged for FY24 as they are indexed to AWOTE (and wages have not been increasing as fast as Consumer prices). The concessional contributions cap will remain at $27,500 pa, and the non-concessional contributions cap will remain at $110,000 pa. Special arrangements exist for ‘unused’ amounts from previous financial years.