The new Labor Government’s 2022-23 Federal Budget is positioned as being ”responsible”, with the focus of the proposals being to deliver a more modern economy and responsible economic management. While there are a number of proposals designed to deliver on these fronts, the overriding themes are restraint and resilience, given the challenging global and local conditions. As expected, there are no new superannuation-related measures—it is more a matter of confirming previously announced proposals.
Restraint in challenging times
The Labor Government delivered its first budget in nearly 10 years, after winning the Federal election in May. The outlook for the global economy has become more challenging, given aggressive central banks and the impact of the conflict in Ukraine on commodity prices. We think that the probability of a US recession has risen to 55%, with that probability notably higher in Europe and the United Kingdom.
The Australian economy has proved quite resilient to these slowing forces, thus far, but we think that we have now seen the best of economic growth and are looking at a notable slowdown in the next 12 months. Along with monetary policy tightening, there is also the drag of slower growth in China and the uncertainty around consumers’ response to the falling housing market. That said, we think the odds of a recession in Australia are lower than those in the US.
Budget deficits to persist – but no cause for concern
Compared to the expectations at the last Budget in March 2022, the economy (led by commodity prices and a robust labour market) has been much stronger and this has led to a reduction in the 2021-22 deficit. However, unlike the last Budget, most of this improvement has been saved—with very little net new spending in this Budget announcement.
Looking further ahead, the Budget deficits for 2023-24 and onwards are expected to remain within the 1.5 – 2% of Gross Domestic Product (GDP) range, driven by structural spending costs (including aged care and the National Disability Insurance Scheme or NDIS) and a slower economic growth profile. It is important to note that these are not levels that cause concern for the fiscal outlook.
GDP, population and wages – growth interrupted
The growth outlook has deteriorated, with the Budget expecting that GDP growth in 2023-24 will be one percentage point lower than previously expected (1.5% versus 2.5% in the last Budget), given the rise in interest rates, China’s slowing growth and the conflict in Ukraine. If population growth gets back to previous levels of above 1.5%, this means Australia will experience a per-capita recession under these forecasts.
The labour market is expected to slow, with the unemployment rate rising to 4.5% in 2023-24, which is expected given the dynamics of a slowing economy and increasing immigration. Wage growth is expected to rise to the ideal range of the Reserve Bank of Australia (RBA) in nominal terms but, in inflation-adjusted terms, wage growth is likely to remain negative for the next two years.
Unlike previous Budgets, there is little in the way of new infrastructure spending announcements. This is in line with reluctance to put in new spending and the backlog of infrastructure projects still in the system. There will, however, likely be some infrastructure announcements from the New South Wales and Victorian governments soon.
Inflation – peak times ahead
Inflation assumptions have been revised higher relative to the last Budget and are largely in line with the RBA’s view that inflation peaks at the end of this year and gradually moves lower. While there aren’t too many new measures in this Budget, there are some targeted packages for electricity bills, given there is a 30% increase in electricity prices expected in 2023. This is a notable difference to the last Budget that was very focused on cost-of-living relief.
Government debt – at (relatively) low levels
Budget deficits are anticipated to remain in the 1.5% to 2% of GDP range, while net debt is expected to reach 28.5% over the forecast period. This leaves some room for more aggressive policy action on deficits, should we see a more dramatic downturn in the economy. This prudent approach to deficits should help with the maintenance of Australia’s AAA credit rating.
One thing that has been very topical in recent months is the increasing cost of debt for the Federal Government, given the increase in interest rates. While it is true that higher interest costs are becoming more of a headwind (currently at 0.7% of GDP and projected to rise to 1.0% over the forecast period), it is important to highlight that the average debt maturity is only around seven years and Australia still has a low debt level, relative to other developed economies.
Implications for asset classes and portfolios
Like previous years, fiscal policy continues to take a backseat to monetary policy and global developments (except for UK fiscal policy, which has likely given governments around the world caution in pursuing expansionary policy in the current environment). In fact, the Prime Minister and the Treasurer have both stressed that fiscal policy needs to work together with monetary policy.
Given there is limited net spending and little change in the fiscal impulse, this Budget announcement does not have any major implications for asset classes or our portfolios.
|Bonds||We continue to think that the market pricing for RBA rate rises is too aggressive and note that the RBA is one of the more cautious central banks globally. This suggests that Australian government bonds should outperform, or at least not underperform, global bonds over the next 12 months. More generally, we think that attractive opportunities are starting to present themselves within global government bonds, given the higher yields offered.
|Equities||Australian equities have performed well relative to global equities through 2022, boosted by the delayed reopening in Australia (post-COVID19 restrictions) and, more importantly, the commodity exposure. While this tailwind could persist a bit longer, the hurdle for further outperformance has become higher. When we look at the drawdown in global equities, the sell-off is close to the average experienced during a cyclical recession. In Australia, the drawdown has been notably less—while we do think the odds of a recession are likely lower in Australia than the rest of the world, it would seem this is already being priced by the market.
|Currencies||Finally, let’s touch on the Australian dollar. It has been a very tough year for most developed market currencies against the US Dollar, and the Australian dollar has been no exception. On a trade-weighted basis though (a measure that weights currency crosses by the prevalence of trade), the Australian dollar has only marginally declined. We are taking a very disciplined approach to hedge ratios within the portfolios, but would look to increase our hedging against the Australian dollar if we saw the AUD/USD rate fall to 60 cents or lower.
Confirmations and commitments
As expected, there were no new superannuation measures announced in this Budget. The Budget confirmed several initiatives that the Government has previously announced, or Coalition policies that the Government had indicated they would support, including:
- Extending access to downsizer contributions to people aged 55 to 59 (currently only available to those 60 and above). Downsizer contributions rules allow contributions of up to $300,000 per person from the sale of their home into a super fund.
- Effectively increasing the Pension Work Bonus threshold from $7,800 to $11,800 for the 2022-23 financial year (only). The Pension Work Bonus is the maximum income an Age Pension recipient can earn before their pension is reduced.
- Increasing the exemption period for the proceeds of a home sale from the Age Pension assets test from 12 to 24 months. This allows pensioners additional time to sort out their affairs—post a home sale and before their Age Pension is impacted—and is designed to encourage pensioners to downsize.
National Housing Accord
While not directly a superannuation initiative, the Government has also announced a National Housing Accord, aimed at bringing together various stakeholders (including all levels of government) to increase housing supply. While the details of how this would work is not yet clear, the Accord is positioned as an enabler for investors (including superannuation funds) to invest in affordable housing.
Similarly, there are several announcements in the Budget on energy transition and digital infrastructure initiatives that may present some investment opportunities for superannuation funds.