Australia’s Federal Budget Preview: what to expect from this year’s budget

The economic data that matters:

What is the market expecting from this budget?

This budget is of major significance to the Australian economy. As the pandemic crisis continues, and the economy struggles to recover, fiscal stimulus is the key policy tool to guide it through the Covid-19 recession. A lot will hinge on how large the aggregate spend by the government, as will the overall budget deficit. Market expectations are for a budget deficit that will come in between the A$200 - A$300 billion mark – a large increase from the A$85 billion printed in the Government’s last budget update.

What are the key areas to watch in the budget?*

Infrastructure spending

The marquee feature of the Australian Federal Budget will likely be key infrastructure spending measures. The lynchpin of the Morrison Government’s attempt to stimulate the economy and repair the jobs market, several major infrastructure spending packages are tipped to be announced in the budget. A$7.5 billion has been earmarked for transport infrastructure upgrades across the country; A$3.5 billion is likely to be allocated to upgrading parts of the NBN, and A$1.5 will be spent on “shock-proofing” areas of the economy disrupted by the Covid-19 pandemic.

Wage subsidies

Wage support remains the Australian Government’s biggest expense as it looks to navigate the economy through the recession. The ongoing cost of the reduced and extended Job Keeper and Jobseeker payments will be closely watched, as will any policy that’s designed to subsidize workers’ wages. One such measure is predicted to be a targeted 50% wage subsidy for businesses who hire apprentices and trainees, which will cost the budget A$1.2 billion, and is projected to extend to 100,000 workers.

Support for business

Easing the tax and regulatory burden experienced by small businesses is expected to be a key feature of this budget. There are ten tax concessions that business turning over between A$10 - A$50 million can access, which includes cuts to fringe benefits tax and deductions to start-up expenses and other investments. Businesses will also be able to lower their fringe benefits tax if retraining workers. While looser insolvency laws will provide greater leeway for businesses to stay in business while recovering from the Covid-19 crisis.

Tax cuts

There’ll be several measures to support households in this budget. But the most noteworthy may be the round of backdated tax cuts extended to individuals. The tax cuts are being brought forward from the 2021/2022 financial year and is expected to cost the budget an estimated A$200 billion. The cuts themselves, which were initially designed to combat the effects of inflation and bracket-creep, will see workers earning above A$90,000 pocket a tax cut, and will see the upper limit of the lowest tax bracket lifted to A$49,000.

Support for housing market

The Government has made a clear effort to throw support behind the housing market during this recession. Already, the Morrison Government has announced a relaxing of lending standards, which would lower the burden for consumers to access a home-loan, and reduce the regulatory burden on banks to extend credit. The budget is also expected to expand a program that sees the Government shares-in contributing to a first home-buyers deposit, whereby buyers can enter the market for new properties with a loan-to-value ratio as little as 5%.

*This is not an exhaustive list of what may be included in the 2020/2021 Federal Budget.

How could the Federal Budget impact the financial markets?

A big spending, deep deficit budget is priced-in to the market. However, there’s a broad variance in how much money will be spent, and how large the deficit will be. If both come in bigger than expected, then the effect will likely meet with a degree of bullishness amongst market participants. This would likely see higher yields, with a steepening yield curve; a subsequent and probably temporary boost to the Australian Dollar; and a lift in domestic-oriented areas of the ASX, such as the banks, industrials and consumer sectors.