Phil Anderson, AFA Chief Operating Officer, said the AFA is pleased that there were no detrimental changes to the superannuation system beyond those previously announced on 5 April this year.

“It is important for consumer confidence that short term changes are avoided and we focus on the long term success of our superannuation system in order to encourage greater self reliance in retirement,” he said. “We are pleased to see an increase to the contributions cap for older Australians and the changes to excess concessional contributions,” he said.

Mr Anderson said the increase in the concessional contribution cap to $35,000, which is expected to be implemented from 1 July this year for those 60 and over, and from 1 July 2014 for those over 50, will better allow for older Australians to prepare for retirement, and pave the way towards a more stable superannuation system.

The pilot program that will allow senior Australians to downsize their family home and put the proceeds into a special account, exempt from the pension means testing, has been welcomed by the AFA, subject to further details and consultation.

At the family end of the spectrum, Mr Anderson said financial advisers will need to work with clients, to consider the implications of the changes to family tax benefits and the other budget measures.

“For the average Australian family, the reduction of family assistance benefits and the removal of promised tax cuts means the average family budget will be tighter,” he said. “What is clear from this Budget is that the fiscal position for Australia is challenging and further pressure on the Federal Budget is likely in the near future.  Accordingly, access to financial advice will be increasingly important for all Australians”

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The key points are as follows:

• The positives in the Budget are more for education, disability care & roads and savings in middle class welfare.
• However, the deficit is far worse than expected, with a surplus pushed out at least three years.
• While the Government has announced more budget savings their impact is zero for the year ahead.
• It’s hard to see major investment market implications flowing from the Budget, although the initial reaction in the currency market was negative.
• Australia’s public finances are benign compared to other advanced countries, but given the biggest resources boom in our history they should be far stronger.

To read this edition of Oliver’s Insights, click here.

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It’s always important to remember that it is just a budget, the same that any household or company would prepare. Assumptions are made; forecasts are taken; and events can change!

For instance the first forecast for the 2012/13 budget outcome was made in May 2009 and a deficit of $28.2 billion was projected. By May 2010 that estimate had changed dramatically to a projected surplus of $1.0 billion. But the deficit for the twelve months to February was just under $38 billion and the latest estimates project a deficit near $19 billion for the current financial year.

To see CommSec’s Budget Chart Pack, click here.

But at the end of the day most people want to know what’s in it for them. It doesn’t matter whether you are a student, pensioner or CEO of a major company.

First things first

• This year (2012/13) the budget deficit is tipped to hit $19.4 billion (1.3 per cent of our economy or GDP). Last October, a surplus of $1.1 billion was expected.
• Next year (2013/14) a deficit of $18.0 billion (1.1 per cent of GDP) is expected.
• The budget is expected to return to balance (actually a small surplus of $849 million) in 2015/16.
  Revenues are tipped to rise by 7.3 per cent in 2013/14 while real spending is tipped to rise by 4.3 per cent.
  Net government debt is expected to peak at 11.4 per cent of GDP in 2014/15 .Previously net debt was to peak at 9.6 per cent of GDP. Whichever way you cut it, debt is low on a global perspective.

Did the Government get it right?

• This is the last Budget by a minority Government before the Federal Election. So we were never going to get first-best outcomes. In fact if the Government had a choice, it probably wouldn’t be handing down a Budget at this time. Better that the election was out of the way and decisions could be made with a view of the longer term. Given the choice, it is unlikely that the Coalition, Greens or independent members would have opposed a decision to hand down a Budget after the election was out of the way.
• So in many respects this is a housekeeping Budget by the Government. Still, the Budget also showcases many longer-term initiatives such as Education reform and the National Disability Insurance Scheme. The current Government has sought to leave a legacy – whether it is returned to power or not. It also allows the Government to claim that its focus is not just on the short term but on the longer-term prosperity of the nation.
• Of course budgets are always a mix of politics and economics. That is a given. The Government of the day has its priorities and agenda and these are reflected in budget strategies, decisions and outcomes.
• Clearly one of the clear stand-outs from this Budget – especially when you compare it with last year’s statement – is the absence of a Budget surplus. In fact the Budget is not expected to return to surplus for at least another three years.
• But it was always going to be difficult to conjure up a surplus in the current financial year – it would have been the biggest turnaround in the Budget bottom line in over 50 years. But it was always the intention to reduce the size of the deficit that was most important, not the desire to produce a surplus (and a wafer-thin surplus at that).
• This year the Government has rightly done away with the single-minded focus on surpluses. In its place is a desire to balance the budget, live within our means and improve social infrastructure.
• So certainly this is a less “flashy” budget than last year, with the claim that the budget will return to surplus quickly and further that small surpluses will be achieved in the out-years. But this is where the Government gets it right – setting a path to surplus but not achieving it in a hurry. That is, aim to ensure that the economy continues to grow, thus lifting tax revenues and therefore gradually chip away at the deficit over the next three years.
• The key initiatives of the Budget are certainly not new but have been announced, telegraphed and or previously thrashed out. These include the Gonski education reforms; the national disability insurance scheme – DisabilityCare Australia; and the increase to the Superannuation Guarantee levy. There is more spending on health and infrastructure.
• But there are a few nasties as well. The $5,000 baby bonus will be scrapped. The Government won’t proceed with the proposed increase to Family Tax Benefit A.
• So overall, this is a less “flashy” Budget – very much a house-keeping or ‘workman-like’ Budget. Just ahead of the election it is not time for controversial, visionary decisions. Rather it is a time to portray the Government as a caring but economically responsible manager of the nation’s affairs.

What does it mean for Australia?

• This Budget is very focussed on investment, and not just on the usual economic infrastructure like roads, but also social infrastructure such as health, provision of a disability insurance scheme and education.
• The Government continues to focus on reducing the size of the budget surplus but the path is clearly flatter than that projected last year. In fact the net impact of budget decisions will actually increase the size of the budget deficit this year by $2.35 billion and lift the coming year’s deficit by $286 million. Where the Budget is expected to have an impact is on the out-years, from the 2014/15 year.
• So austerity is ‘out’; rather the focus is on maintaining economic growth, ensuring that the very needy are supported while laying a groundwork for future social initiatives.
• Overall then the Reserve Bank is not given fresh ammunition to cut interest rates. Not only has fiscal policy become more neutral in the short term, but the Aussie dollar has weakened, thus supporting businesses, and there are more encouraging signs for the global economy – especially in the US, China and Asia.

Who are the winners?

• Schools: Commonwealth funding of $9.4 billion over six years
• Farmers: Concessional government loans worth around $420 million to help farmers restructure their debts.
  The disabled: the 0.5 per cent rise in 1.5 per cent Medicare levy to pay for the national disability scheme, raising about $3.3 billion.
• Defence: spending increases slightly to $113 billion over the four years.
• Pensioners: can sell their long-term home and invest up to $200,000 without affecting their pensions.
• Drivers along the East Coast: $4.1 billion over a decade for upgrade work on the ageing Bruce Highway in Queensland and Federal, NSW government to each contributed $400 million to commence building the $3 billion tunnel linking F3 and M2 motorways in Sydney.
• Single mothers and the unemployed on Newstart will be allowed to earn an extra $38 a fortnight, up to $100, before their benefits are scaled back.

Who are the losers?

• Tax Payers: deferral of second round of tax cuts.
• Families: The increase to Family Tax Benefit A worth a total of $1.8 billion for 2013/14 is to be scrapped.
• Expecting families: The baby bonus is expected to be axed from March 2014 and replaced with a $2000 Family Benefit Part A payment for the first child or $1,000 for the second or subsequent child – which will cut out for those on household incomes above $110,000.
• University students: changed payment structure for fees, scholarships and deductions including Student Start-up Scholarships as income contingent loans, rather than as grants. Total government saving of more than $2.5 billion.
• Public servants: $580 million of cuts to the public service over the forward estimates.
• Big business: crackdown on large company, multi-national tax minimisation schemes generating $4.2 billion of savings over the next four years. Monthly instalment payments (PAYG) for large taxpayers including trusts, superannuation funds, sole traders and larger investors generating $1.4 billion of savings over the next four years.
• Smokers: cost of standard packet of 25 cigarettes rises by 7 cents.

Impact – Rates, $A, Shares
Interest rates

• Fiscal policy has been contractionary but now can be regarded as neutral to slightly contractionary. That is the budget deficit has been reducing over the past year and further modest reductions are expected over time. Certainly the Reserve Bank acknowledged that “ongoing fiscal consolidation” is “likely to weigh on growth over the next year or so.” As a result the Reserve Bank cut rates last week and it will continue to lean in favour of further rate cuts.
• So to a large extent fiscal policy settings are already factored in by the Reserve Bank. As a result we think other factors will be more instrumental in prompting the Reserve Bank to cut rates again. For instance if the Australian dollar remains historically high, domestic economic growth softens from the rate currently assumed, or there is new deterioration in the health of the global economy. Still, the Aussie dollar has softened recently and the outlook for the US economy is brightening. If those developments continue then no change in rate settings would be necessary.
• The recent rate cut by the RBA was part of co-ordinated action by global central banks to lift growth. European and US policymakers may seek further assistance to boost global growth. As a result, we are currently pencilling in a 25 basis point rate cut in August.

Australian dollar

• We don’t believe there are major implications for the Australian dollar from decisions made in the latest budget. Still, that has been the case for probably a decade now.
• While fiscal policy has been contractionary, monetary policy has remained accommodative. The interesting point is that the Reserve Bank recently noted that “The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time.”
• The next few months could prove interesting for the Aussie dollar. Global central banks have been cutting rates to lift global growth. At the same time the US economy has strengthened, leading to more chatter amongst Federal Reserve members about a scaling back of stimulus (quantitative easing). As a result the US dollar has recently attracted some support, putting downward pressure on other currencies (such as the Australian dollar). If that process continues, businesses in those countries where exchange rates have been strong (like Australia) will receive some relief.
• We expect the Aussie dollar to hold between US96c to US107c over the next year.

Sharemarket implications

• Retailers: Mildly negative, cuts to family welfare payments, reduction in the baby bonus and increase in the Medicare levy will reduce discretionary household funds. Over the near term growth is likely to be subdued with a modest rise in the unemployment rate. But Treasury expects consumer activity to pick up as low interest rates and growth improves over the medium term. Household spending growth of 2.5 per cent is tipped in 2013/14 and 3.0 per cent in 2014/15.
• Transport & Construction: Committing to the next wave of infrastructure investment of $24 billion – over six years should support construction and transport stocks.
• Finance: Local banks are expected with tougher rules flagged for locally-based, low-taxed banking units that sell their services to overseas customers.
• Stockbrokers: A ban on a strategy known as ‘‘dividend washing’.’ The strategy, used by domestic investors, allows them to effectively double the tax break they receive from franking credits.
• Healthcare: Negative for GP funding. We rate this budget as relatively more negative for Primary Health Care than Sonic Healthcare, given its bulk billing model and relatively larger earnings exposure to medical centres. Slightly positive for pharmacy wholesalers, Ramsay Health Care. If the government forecast for PBS growth come to fruition, there are upside risks to listed wholesalers Sigma Pharmaceutical and Australian Pharmaceutical Industries.

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This Federal Budget confirmed the pre-announced changes to remove the inequitable tax treatment of deferred lifetime annuities and give them the same tax treatment as current income streams.

The government also announced a new pilot scheme to allow senior Australians to downsize their home without reducing their Age Pension if the home has been owned for at least 25 years. Amounts up to $200,000 can be deposited into a separate account which will be an exempt asset for up to 10 years.

In response Actuaries Institute CEO Melinda Howes said; “We were encouraged by the confirmation of more favourable tax treatment of deferred lifetime annuities, which will provide retirees with the ability to insure their longevity in a more cost effective way.

“The new announcement allowing the downsizing of a retiree’s home without reducing Age Pension is a sensible initiative which will assist the current generation of retirees who didn’t have compulsory super for their whole working lifetimes, and for many of whom the family home is their main retirement asset.

“Actuaries play a unique role in business and society through their ability to assess risks through long-term analyses, modelling and scenario planning,” she said.

One of the key risks identified by the Institute is ‘longevity risk’ – the risk of people outliving their retirement savings. In September 2012 the Institute released the white paper “Australia’s Longevity Tsunami, what should we do?”, which emphasised the need for retirement policy reform in the face of Australia’s steep and continuing rise in life expectancies.

Ms Howes said underestimating life expectancy will have major implications for retirement incomes policy, which must take into account individual financial security as well as the economy-wide costs of providing for an ageing population.

“There is an urgency of the situation we are facing – we don’t have years to reform the system – the current generation of workers need better retirement product solutions now. The current system and most people’s own planning do not take into account how long the current generation of Australian workers will live,” Ms Howes said.

“It was encouraging to see the budget remove one of the key roadblocks to developing better post-retirement products by changing the tax laws on deferred lifetime annuities (which are essentially longevity insurance). We look forward to continuing to work with policymakers to ensure the way is cleared for innovative products to be developed to assist our increasing number of retirees to manage their retirement risks.”

“While this move is encouraging, the government and financial services industry need to better educate consumers about the role deferred lifetime annuities, and indeed, other longevity / mortality pooled products, can play in securing an adequate retirement income in extreme old age. It’s all about how the product is presented to you – At the moment many Australians view annuities as expensive as they do not realise how long they will live.”

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“The Government announced its intended changes to superannuation before the Budget on 5 April to end the damaging uncertainty that was being caused by speculation around whether superannuation tax concessions would be cut.
 
“We are pleased that, aside from a few minor technical amendments, the Government stuck to its word and did not introduce any more changes to superannuation in tonight’s Budget.
 
“SMSF trustees should now feel more confident that the superannuation system is off the Government’s radar and remains Australia’s primary retirement savings vehicle.”
 
When the Government previously announced its superannuation policy package on 5 April, SPAA welcomed the move to provide clarity for the SMSF industry.
 
In particular, SPAA welcomed the increase to a $35,000 concessional contribution cap for over 60s in 2013-14 and over 50s in 2014-15, an issue where SPAA has been at the forefront.
 
SPAA also was positive about the proposed changes to the excess contributions tax regime to make it fairer and the establishment of a Council of Superannuation Custodians.
 
“We look forward to working with the Government when they legislate these positive changes to super,” says Mr Colley.
 
However, he cautioned that the Government’s move to apply tax to earnings above $100,000 on assets supporting income streams could introduce substantial complexities and costs to the super system.
 
“We have already outlined our concerns about this proposal to the Government, and will expect to work closely with Government on the details of this measure to minimise the costs and complexities for SMSF trustees.
 
“The fact that the Budget papers provide $43 million to administer this measure for an estimated 16,000 affected taxpayers shows its complexity.”
 
On the changes to cap self-education expense deductions at $2000 per year from 1 July 2014, Mr. Colley said that SPAA was disappointed that the Government was proceeding with this measure as it will increase the cost for SMSF professionals to maintain their current knowledge and competencies.
 
“As a market leader in SMSF accreditation, SPAA sees this change as a real blow to SMSF professionals that want to stay up-to-date and competent.”

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The FPA also welcomes positive changes announced in respect of the raising of superannuation caps, as recommended by the FPA in its pre-Budget submission. The cap on concessional limits to superannuation will be raised to $35,000 for 60 year olds from 1 July 2013 and will be again raised to $35,000 for 50 year olds in July 2014. The excess contribution tax rate will also be changed to reflect personal marginal tax rates, a move welcomed by the FPA.

Dante De Gori, General Manager Policy and Standards at the FPA said:

“The FPA strongly urged Government to avoid tinkering with superannuation and we are happy to see Treasurer Swan has avoided changes that would reduce incentives and benefits of the superannuation system. We endorse a sensible introduction of changes to encourage people to save for their retirement with greater certainty. The FPA encourages all working Australians to become self-funded in retirement and we welcome the changes made to the superannuation caps and to the excess contributions tax which will assist with this.”

However, the Budget did nothing to support small business.

“We are disappointed to see no announcement in support of small business across Australia. The financial planning profession has been and will continue to be under significant strain as a raft of new regulation come into effect in 2013. These small financial planning businesses will receive no support from Government with the implementation of Future of Financial Advice laws on 1 July. This is unfortunate however we encourage all financial planners to use all the tools and support being provided to you through your professional association.”

The FPA welcomed announcements made on the Disability Insurance Scheme but asked consumers to check with their financial planner to ensure they are fully covered.

“The FPA fully supports the Disability Insurance Scheme and understands the need to increase the Medicare Levy to fund this positive initiative. While the Disability Insurance Scheme will benefit a number of those who are eligible, we encourage families and those people who qualify under the scheme to speak to a qualified financial planner to ensure you are fully aware of your entitlements. FPA will continue to promote the value of advice and the need for Australians to be adequately insured as the Disability Care can only ever be a safety net and nothing can replace the benefits for effective insurance.”

Dante De Gori will be holding a free webinar for FPA members on May 15th where other financial planners can join to hear his summary on this year’s Budget. The webinar will guide FPA members on changes for financial planning stemming from the Budget and the ways in which clients may also be affected.

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• The Prime Minister confirmed it today by implying that the deficit (the underlying cash balance) would be around the $11bn level, or 0.7% of GDP. The most recent forecast, in October’s Mid‑Year Economic and Fiscal Update (MYEFO), was for a small surplus of $1.1bn or 0.1% of GDP. But there was little new detail for the markets. We will have to wait till 14 May, Budget night.
• The shortfall in company tax revenues is seen as the main problem by the Government. The MYEFO had company tax in 2012/13 at $71.2bn, which was a $2.3bn downgrade from MYEFO. Whereas it now looks as though company tax will be even lower. The tax shortfall is being driven by a higher than expected Australia dollar (AUD) combining with lower commodity prices to weaken taxable profits of Australian corporates.
• To put the revenue numbers in perspective, the Federal Government MYEFO forecast had total 2012/13 cash receipts at $367 bn or 24.0% of GDP. Company tax, at $71.1bn, is only 20% of total revenue. In comparison, personal income tax, at $160bn, is 45% and was unchanged from the MYEFO forecast. At first glance, it would appear that a small change to personal income tax arrangements could cover the company tax shortfall.
• The nominal economy, which determines the growth in the tax base and collections, is growing at a slower pace than previously expected. Today’s update implies that nominal GDP growth in 2012/13 could be near 3% compared to the 4.2% expected in the MYEFO and 5.1% in last year’s Budget. The high AUD, weaker company profits and flat property markets are all part of the weaker revenue picture. Note that personal tax receipts, which depend on jobs and wages growth, were revised down marginally in the MYEFO to $174.5bn. The jobs market looks to be in better shape than ABS data indicates.
• The Government’s problems with the Budget are also due, in part, to their own spending decisions. The outlays side of the Budget has not been pared back in line with the slide in revenues. MYEFO had total outlays at $363.2bn, or 23.8% of GDP. Measures to make “savings” or cut expenditure leakages have not been sufficient to bridge the widening gap. It partly reflects the political problems of minority Government, with all decisions, especially “cuts” subject to the approval by those with the balance of power in the Lower and Upper Houses.
• The 2013/14 May Budget will be mainly about how to fund the “big ticket” reforms such as education and the NIDS, within the constraints imposed by the new normal of weak revenue growth. On State revenue issues, the Prime Minister today ruled out any changes to the GST.
• There is not much talk about future deficits. There is still an intention to produce Budget surpluses in the future, “over the course of the business cycle”. But ongoing modest deficits look to be reasonably likely without a mixture of deeper spending cuts and tax increases. The latter may involve the “winding back” of personal and company tax concessions.
• The proximity of the 14 September election means that there will be another fiscal update, the Pre‑election Economic and Fiscal Outlook (PEFO), ten days after the writ for the election is issued.

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