11 May 2021

Federal Budget Review – Necessary but not wasteful.

We review the Australian Federal government’s 2021/22 budget and assess its implications for Australia’s financial markets.

  • This is an expansionary and highly pro-growth budget aimed at building on the recent economic rebound, addressing and supporting areas still under pressure from COVID-19 drags and funnelling funds into raising social equality as welfare payments (JobKeeper) unwind.
  • The government has shown a strong willingness to normalise growth and support the economy at the expense of its fiscal position. Given ongoing drags from the global pandemic, it is not unreasonable to think that it strikes a balance between short-term goals and long-term costs given income supports are rolling off, employment and wage growth remain below pre-COVID-19 levels and parts of the services sector remains under social restrictions.
  • The stronger-than-expected economic recovery has improved the budget position. The underlying cash balance is now expected to be a deficit of $161 billion in 2020-21, compared with $213.7 billion at the 2020-21 Budget, $197.7 billion as at MYEFO and $106.6 billion in 2021-22. Net debt is now expected to peak as a share of GDP at 40.9 per cent, compared with the 43.8 per cent peak projected at the 2020-21 Budget.
  • Despite a better-than-expected fiscal position, there is a degree of restraint with the budget with ongoing but declining deficits. We identify 6 key areas of policy support and focus: 1) aged care; 2) childcare; 3) housing; 4) travel & education; 5) infrastructure; and 6) taxation.
  • This is a business-friendly budget but not one which is likely to drive a sustained re-rating in the equity market or a de-rating in the A$ due to the additional debt load. Traditionally, budgets are not market moving events and this one should be no different. Equity investors should be encouraged that the “punch-bowl” has not been removed, ensuring that support for recent areas of strength remain (i.e., consumption and housing).
  • The focus on transitioning the economy off welfare payments makes for selective tailwinds at a sector and industry level rather than a rising tide. We think banks, property, travel and infrastructure are key beneficiaries.

This budget was all about consolidating recent economic gains, transferring away from welfare payments (JobKeeper) and adjusting policies to drive a jobs-led economic recovery.

The budget position was well ahead of Treasury’s forecasts last December in the Mid-Year Economic and Fiscal Outlook (MYEFO) due to better-than-expected jobs growth and commodities pricing. This has left the Government in a position where they can boost spending while running smaller deficits than previously anticipated.

Budget to remain in deficit to support recovery

Source: ABS, Treasury, Macquarie Macro Strategy, May 2021

Supporting people back into paying jobs is the key thrust of this Budget as it will provide a boost to the economy while also reducing welfare payments. The unemployment rate is already nearing pre-pandemic levels with the Government now targeting full employment before considering fiscal repair. This could be achieved far more quickly than history would suggest, due to international borders remaining closed, but the fiscal impulse should remain firmly stimulatory particularly ahead of the next election.

This was a less dramatic budget than October’s big-spending pandemic-delayed budget. The focus has shifted away from providing consumers and industry with safety nets and highly generous incentives towards more targeted support and transitioning the economy onto a self-sustaining recovery.

The economy still faces challenges and has been prone to Covid-related disruptions in recent months. As such, it is still far too early to contemplate shifting towards budgetary repair when the recovery could potentially be upended.

Key Budget metrics & forecasts

Source: ABS, Treasury, Macquarie Macro Strategy, May 2021

Aged care and childcare have received large increases in funds which will be permanent fixtures of future budgets, but these changes are simply necessary and overdue to address industry shortcomings (aged care) and structural issues of current funding arrangements (childcare).

Net federal government debt is still forecast to increase over the forecast horizon, reaching nearly 41% of GDP in 2024-25. Australian Government Securities on issue – gross debt – is forecast to climb to $963b by 30 June 2022 and $1.2tr by mid-2025.

Swift jobs recovery, but full employment the goal 

Source: ABS, MWM Research, May 2021

We review the major policy initiatives below.

1. Essential services

The centrepiece of this budget is a $17.7b aged care package to address the shortcomings highlighted by the Royal Commission into Aged Care Quality and Safety. The NDIS will also receive a further $13.2b over four years while $2.3b will be allocated to mental health and suicide prevention.

Key initiatives include:

  • $7.8b to reform residential aged care to improve safety and quality of care including a new funding model for the aged care sector
  • $6.5b to support older Australians to stay in their homes longer with an additional 80,000 additional Home Care Packages
  • supporting a further 33,800 training places via JobTrainer so existing and future aged care workers can improve their qualifications.

2. Travel and aviation

The Budget included a $1.2b travel and aviation package to support the recovery of one of the hardest hit sectors last year.

  • 800k half-price domestic flights (660k already sold) to support local tourism and related jobs
  • preserving Australia’s international airline capabilities with 8,000 jobs supported to allow international flights to resume when borders reopen
  • international students will be allowed to work more hours (in the travel and hospitality sectors) with the current cap of 40 hours per fortnight to be removed.

Support required while borders are closed 

Source: ABS, Macquarie Macro Strategy, May 2021

3. Childcare and preschools

The childcare package ($1.7b) is designed to make childcare more affordable, thereby increasing the uptake of centres and allowing parents to either re-enter the workforce or increase their hours worked. The changes remove disincentives to work and are expected to boost GDP by up to $1.5b per year and benefit ~250k families.  

The key initiatives announced were:

  • Subsidy increase – the daily subsidy will be increased for second and subsequent children. This should significantly reduce the cost burden for families, particularly larger families, and see a greater uptake in childcare centres.
  • Removal of annual cap – the annual subsidy cap of $10,560 per child will be removed from 1 July 2022.
  • Preschools – $2b will be invested over four years to increase participation and improve school readiness.

Childcare occupancy likely to increase

Source: G8 Education, May 2021

4. Housing

Housing features in most Federal Budgets but it is noteworthy to see housing stimulus measures in the context of a very bullish property market. Housing grants typically translate to higher prices, and it is possible macroprudential rules are introduced sooner rather than later as a result.

There were three key policy changes for housing:

  • Family Home Guarantee – a new home loan scheme designed to support single parents with dependants into the housing market with a deposit as low as 2% required.
  • New Home Guarantee – this existing scheme allows first home buyers to build a new home or purchase a newly built home with only a 5% deposit without paying Lenders Mortgage Insurance. It has been expanded with a further 10,000 places added to meet ongoing demand.
  • First Home Super Saver Scheme – an existing scheme which allows first home buyers to access their superannuation rather than saving for a deposit. The existing $30,000 cap on withdrawals will be increased to $50,000.
  • HomeBuilder – the six-month construction commencement period has been extended to 18 months with the intent of smoothing out the home construction pipeline and support building jobs through 2022.

Owner-occupiers to receive further support

Source: ABS, Macquarie Macro Strategy, May 2021

5. Infrastructure

The Budget included $15.2b (over 10 years) for road and rail projects across Australia. The labour-intensive projects are expected to create approximately 30,000 jobs in mostly regional areas. Major projects include:

  • $2b for the Melbourne intermodal terminal
  • $2b to upgrade the Great Western Highway in NSW
  • $2.6b for North-South corridor in South Australia.

6. Taxation

The Budget included several taxation initiatives:

  • Businesses will benefit from the one-year extension of temporary full expensing and temporary loss carry-back into the 2023 financial year, amounting to $20.7 billion over the four years to 2025.
  • The Low and Middle Income Tax Offset (LAMITO) will be extended another year, amounting to $7.8 billion. The LAMITO provides a tax offset of up to $1080 for singles and $2,160 for dual-income couples. This will benefit ~10m workers earning up to $90,000.

Equity market takeaways

This is a business-friendly budget and we do not see anything that is a major concern for the overall equity market. The ‘pro-growth’ focus should be welcomed, following years of budget repair, particularly when the economic recovery remains vulnerable to disruptions and the vaccine rollout has underwhelmed.

Corporate confidence and conditions are at all-time highs and should remain in positive territory following this Budget. A broad range of indicators, including forward orders and capacity utilisation, suggest the recent rebound in activity is set to continue. M&A should also be well supported by the rebound in activity, high confidence and cheap financing (both equity and debt).

Business confidence to remain elevated

Source: Factset, MWM Research, May 2021

The focus on returning the economy to full employment should provide a solid backdrop for domestic activity to continue increasing and support already positive earnings momentum.

Earnings revisions should remain positive

Source: Factset, MWM Research, May 2021

Targeted stimulus for sectors still on life support such as travel agents is a further positive particularly following the removal of JobKeeper payments. Loosening restrictions on hours worked by international students is pragmatic and should help the travel & hospitality sector cope with meeting elevated demand from discounted flights and ‘dine & discover’ vouchers.

Policy shifts will help address skill shortages 

Source: ABS, Macquarie Macro Strategy, May 2021

If full employment is achieved it would place some upward pressure on wages growth and interest rate expectations, but we think it is far too early for investors to start pricing this in as enough excess capacity remains for inflation pressures to stay muted.

Sector winners and losers

We highlight the major sector impacts below:

Mining – benefit from no new “super profit” taxes

The mining sector should welcome the lack of any new taxes given the current profits the sector is generating. While new taxes were not expected, we have seen increased calls to revisit the mining super-profits tax and/or reduce the diesel excise rebate as well as higher mining taxes offshore (Chile). The Junior Minerals Exploration Incentive (JMEI) was renewed which encourages companies to undertake greenfield minerals exploration.

Banks – Cyclical strength to support borrower quality & demand

We view the pro-growth thrust of this budget and goal of driving the economy to full employment as supportive for the bank sector. Credit growth and quality should be healthy as the economy rebounds which will support earnings and dividends. The property sector remains a priority with mortgage-demand to receive a further boost from Budget measures reducing the hurdles to home ownership. ANZ Bank (ANZ) and Bendigo and Adelaide Bank (BEN) are preferred.

Property – small incremental positives

The property sector will benefit from larger superannuation withdrawals and small deposits for first-home buyers while changes for single-parents should support the build-out of affordable housing options. We prefer Mirvac Group (MGR) for exposure to the apartment segment.

Retail – cycling off large income supports

The Low and Middle Income Tax Offset (LAMITO) is positive for retail stocks. The sector is cycling elevated pandemic spending and fiscal support (tax breaks, access to super, JobKeeper etc) so any additional lump-sum payments will help smooth out revenues for the sector. Preferred stocks include Nick Scali (NCK), Harvey Norman (HVN) and Premier Group (PMV).

Travel – targeted support now in place

The travel and aviation sectors are large employers both directly and indirectly and have received further support in this Budget including subsidised flights and extending the Consumer Travel Support Program to support travel agents. While the international border will remain closed for some time, the industry is of strategic importance and will remain well supported. Preferred stocks include Qantas (QAN) and Flight Centre (FLT).

Childcare – support to boost utilisation

The childcare sector has received a major boost with daily subsidies increased and annual subsidy caps removed. All else equal, this should see utilisation rates increase after what was a hugely difficult 2020 for the sector. G8 Education (GEM) is amongst the largest national operators managing ~470 centres across the country.

Infrastructure – carry on

The ongoing focus on building out the nation’s road and rail network will provide a solid pipeline of work for listed infrastructure and building materials companies. Preferred stocks include Downer EDI (DOW), Seven Group (SVW) and Wagners (WGN).

Additional information

This report was finalised on 11 May 2021

Recommendation definitions (Macquarie Australia/New Zealand)

Outperform – return >3% in excess of benchmark return

Neutral – return within 3% of benchmark return

Underperform – return >3% below benchmark return

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