• Consumer sentiment rose by a small 0.2% in June but is 8.8% below year its year ago level
• Confidence is still being adversely impacted by the negativity around the Federal Budget.
• The positive news is that job security fears receded marginally.  The unemployment expectations index has now fallen for three months in a row, though consumer fears over job loss remain elevated.

The Westpac‑Melbourne Institute Index of Consumer Sentiment was largely unchanged over June.  Sentiment plunged in May following the Federal Budget and is sitting at its lowest level in almost three years.  There is a risk that prolonged weak consumer confidence negatively impacts on household spending and borrowing appetite.

There are many economic, social and political influences on consumer sentiment.  The state of the jobs market is one of the biggest influences on consumer confidence.  In that context, the recent pickup in employment growth and small fall in the unemployment rate would normally have produced a lift in consumer sentiment.  But improvements in the labour market have been overshadowed by the doom and gloom surrounding the Federal Budget.

The consumer response to the Federal Budget is quite clear – they don’t like it and confidence around family finances has fallen as a result.  In the six months to April, consumer spending growth picked up and the household savings rate fell marginally.  Both of these outcomes were a sign of improved consumer confidence.  And they were also both a positive sign for businesses and the Australian economy more generally.  There is a genuine threat to retailers from the big fall in sentiment since May.  This is compounded by warmer weather having delayed traditional seasonal purchases like clothes and household goods.

Looking through the detail reveals that three of the five component indices increased in June.  The largest increase was in family finances in the year ahead (+5.0%) and economy one year ahead (+3.0%).  These were partially offset by family finances year ago (‑5.4%) and economy five years ahead (‑2.3%).  The time to buy a major household item index rose by 1.0%.

The June sentiment release also contains quarterly estimates of consumer preference for the wisest place to put savings.  There were small lifts in the proportions of respondents preferring to pay down debt (17.3%) and invest in equities (9.9%).  Conversely, there were small falls in the proportions of those preferring bank deposits (27.5%) and real estate (24.5%).  The responses are generally reflective of consumer caution, although the proportion of respondents favouring real estate indicates that there is still a reasonable degree of optimism around the housing market.  In addition, the trend down in those preferring bank deposits suggests that consumers are a little less risk adverse.

The Westpac‑Melbourne Institute unemployment expectations index was also published yesterday. It was the main positive in yesterday’s figures and showed that fears over job losses receded marginally over the month.  Notwithstanding, concerns over job security remain elevated.

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RBA Board minutes

• Triple A Credit rating: The Financial Review has reported in an “exclusive” today, that “Rating agency Standard and Poor’s is warning Australia’s prized AAA credit rating could be reviewed unless substantial cuts are made to the budget in coming years.”
• Consumer confidence falls: The Roy Morgan – ANZ weekly consumer confidence index fell by 3.2 per cent to 100.4 in the week to May 18. The index has fallen 14 per cent over the past four weeks.
• Reserve Bank Board minutes: Board members “considered that the current accommodative stance of policy was likely to be appropriate for some time yet.”

What does it all mean?

• All politicians must take heed of the warning by Standard and Poor’s on Australia’s credit rating. Unpalatable choices must be made to the structure of Australia’s pensions, benefits and support payments as well as Australia’s tax structure. The Budget must be passed and bi-partisan agreements are needed on future spending and taxing – that’s what Australians believe that politicians should be doing. No Australian wants the economy to get in the same predicament as a raft of European countries. Australia’s economy is in good shape through good stewardship by Reserve Bank, Federal Treasury and governments of all persuasion over the past 20 years. It is important it stays that way. As former state treasurers acknowledge, the GST rate has to be increased or the tax broadened in coming years to address fiscal challenges with the ageing population. It is important that community discussion on the topic starts now.
• The Reserve Bank believes that everything is going to plan. That is, domestic conditions “had evolved broadly in line with earlier expectations.” In short, there is no need to change monetary settings. Rates are set to remain unchanged for a few more months yet.
• Before the Federal Budget was handed down the Reserve Bank Board observed “Over 2014/15, GDP growth was expected to be a bit below trend, with the effects of monetary stimulus partly offset by the downturn in mining investment and planned fiscal consolidation.” In other words, monetary policy is balancing fiscal policy. We will have to wait for the June Reserve Bank Board meeting to find out whether there is any change in emphasis and magnitude of this balancing act.

What do the minutes and data reveal?

RBA Board minutes

• The full-text of the minutes can be found here.

The key final paragraph:

• “At recent meetings, the Board had judged that it was prudent to leave the cash rate unchanged. The expansionary setting of monetary policy continued to have the expected effects on economic activity. Notably, a sustained increase in dwelling investment was in prospect, consumption had strengthened a little and business conditions were around average levels. Recent developments had indicated that the economy had evolved broadly in line with earlier expectations, resulting in little change in the updated forecasts for activity and inflation. With growth in activity expected to pick up only gradually, and spare capacity in the labour market consequently remaining for some time, growth in domestic costs was forecast to remain contained, which would help to offset the ongoing effect on prices from the depreciation of the exchange rate over the past year. Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet.”
  • The Reserve Bank says that the domestic economy “had evolved broadly in line with earlier expectations.”
  • The Reserve Bank says “Inflation was consistent with the target and was forecast to remain so over the next couple of years.”

Consumer confidence

• The authors report: “The ANZ-Roy Morgan Consumer Confidence fell a further 3.2 per cent to 100.4 in the week ending 18 May, after the 2014-15 Commonwealth Budget was handed down. Consumer Confidence began weakening noticeably four weeks ago when some significant policies were leaked ahead of the Federal Budget’s release and is down a sharp 14 per cent since then; the steepest decline over a four week period since the series became weekly in October 2008.”
  • The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
  • The next interest rate decision on June 4 will be super-important. Not because of some imminent change in rates, but because the Reserve Bank will be able to give its judgement on the fiscal contraction associated with the Federal Budget and the implications that this poses for interest rate settings.
  • CommSec remains hopeful that Budget measures will pass the Senate; that confidence levels will recover; and that economic momentum won’t be adversely affected. We continue to expect the first interest rate hike this cycle to be delivered either late in 2014 or early 2015.
  • The Aussie dollar has lost a bit of ground over the last 24 hours on the warning by Standard and Poor’s. The progression of the Budget through the Senate is a short-term obstacle for the Aussie dollar.
  • The Budget wrangling has upset consumer confidence. In a macro sense the Budget isn’t a major drag on the economy but the perception of hurt from Budget changes is impacting confidence to a greater extent that the reality of the actual decisions.

What is the importance of the report?

• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• The next interest rate decision on June 4 will be super-important. Not because of some imminent change in rates, but because the Reserve Bank will be able to give its judgement on the fiscal contraction associated with the Federal Budget and the implications that this poses for interest rate settings.
• CommSec remains hopeful that Budget measures will pass the Senate; that confidence levels will recover; and that economic momentum won’t be adversely affected. We continue to expect the first interest rate hike this cycle to be delivered either late in 2014 or early 2015.
• The Aussie dollar has lost a bit of ground over the last 24 hours on the warning by Standard and Poor’s. The progression of the Budget through the Senate is a short-term obstacle for the Aussie dollar.
• The Budget wrangling has upset consumer confidence. In a macro sense the Budget isn’t a major drag on the economy but the perception of hurt from Budget changes is impacting confidence to a greater extent that the reality of the actual decisions.

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Jordan George

The Federal Government’s decision to introduce a mechanism to allow taxpayers to withdraw excess non-concessional contributions made after 1 July 2013 is a win for SMSF trustees.

Jordan George, Senior Manager, Technical & Policy, of the SMSF Professionals’ Association of Australia (SPAA), said: “This is good news as it stops punitive tax outcomes where taxpayers can pay up to 93% on excess non-concessional contributions.

“We congratulate the Government on allowing taxpayers to refund excess non-concessional contributions, removing the overly punitive outcomes.

“SPAA has advocated for this treatment of excess non-concessional contributions for many years and is pleased to see the Government has responded to our concerns.

“Although the announcement is welcomed, the Government needs to work though the details of the proposal because the suggestion to allow taxpayers to withdraw earnings associated with the excess non-concessional contributions is likely to result in complex compliance requirements.”

In other superannuation measures, the Superannuation Guarantee (SG) Rate will increase to 9.5 per cent from 1 July 2014, instead of remaining at 9.25% as the Government included in the Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 that it has been unable to pass through the Senate.

The SG rate will then be frozen at 9.5 % until 30 June 2018, and on 1 July 2018 it will resume increasing by 0.5% increments until it reaches 12% in 2022-23.

George said that SPAA was pleased to see that employers and superannuation fund members would have certainty on 1 July 2014 about the SG rate.

“This is important to ensure confidence in the superannuation system.  However, SPAA is disappointed that the SG rate will then be frozen for four income years instead of two as the Government originally proposed. The move to a SG rate of 12% is an important measure in ensuring that Australian’s have adequate superannuation balances.”

As widely foreshadowed, the Government announced it would increase the Age Pension to 70 from 2035. From 1 July 2025, the Age Pension qualifying age will continue to rise by six months every two years, from the qualifying age of 67 years that will apply by that time, to gradually reach a qualifying age of 70 years by 1 July 2035.  People born before 1 July 1958 will not be affected by this change.

George said that SPAA understood the need for a sustainable pension system with an aging population being a major challenge for Australia to address.

“But we still believe that there needs to be careful and considered debate around how the superannuation system and social security system interact with the pension age rising to 70.

“Workers that are involved in physically intensive industries and those that sustain work-related injuries or are unable to work due to illness need to be catered for by a system with a higher Age pension age.”

The Government will ensure that the Age Pension is indexed to the Consumer Price Index (CPI) from 1 September 2017.  Currently, pension payments are indexed in line with the higher of the increases in the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index. 

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Dante De Gori

In Tuesday night’s 2014-15 Budget announcement, the Federal Government held firm on its commitment to avoid adverse changes to superannuation. There are some amendments outlined however that will benefit financial planning clients, and as a result have been welcomed by the Financial Planning Association of Australia (FPA).

Specifically, the FPA welcomes changes to the non-concessional cap, which it views as a fairer and more workable solution. It is also in support of the Government’s stated commitment to increasing Super Guarantee (SG) to 12%, albeit with a slightly changed timeline, and the increase in the pension age.

Dante De Gori, General Manager, Policy and Conduct at the FPA said: “Obviously one of the key areas of interest and concern for financial planners and their clients is the treatment of superannuation. Understanding the positive impact that adequate superannuation can make to clients, we welcome the pledge the Government has made to increasing SG to 12%. There has been a slight rejig of the timeline however which means we will reach 12% a year later than previously proposed. The increase to 9.5% will proceed from 1 July 2014 but will then pause at 9.5% until 30 June 2018, before increasing by 0.5% each year until it reaches 12% in 2022-23.

“Another welcome amendment to super has come in the form of changes announced to the non-concessional cap. Financial planners will be able to help clients navigate excess contributions to ensure they are not negatively impacted as may have been the case in the past. The Budget states that for any excess contributions made after 1 July 2013 which breach the non-concessional cap, the Government will allow people to withdraw those excess contributions and associated earnings. Whether they chose this option or decide to leave their excess contributions in the fund will have different implications and financial planners will be pivotal in explaining this to clients.”

At the same time, financial planners will need to help clients understand and respond to the raft of changes to social security.

“The Budget included a number of changes to social security and it will be up to financial planners to review these changes in detail to identify how their clients’ will be impacted. Changes will see the qualifying age increase until it reaches 70 years by July 2035 which will ensure the longer term availability and feasibility of our pension system. These changes will not affect those born before 1958 so many clients facing retirement in the coming years’ will not be impacted.

“The Government will also commence indexing pension and equivalent payments and Parenting Payment Single by the Consumer Price Index (CPI). Such changes to indexation mean that financial planners will need to review this in line with their clients’ circumstances to determine the impact of these changes on social security and age pension entitlements.”

The Budget also announced funding cuts to the Australian Securities and Investment Commission (ASIC), with the Government predicting savings of $120.1 million over five years as a result.

“The FPA will be paying close attention to the funding cuts earmarked for the regulator. In particular we will be keeping a watch on the impact to the funding in respect to any adverse effect in terms of licensing costs, and the like, for financial planners. We will also seek to ensure no impact on the regulator’s services and capacity to monitor and supervise the industry.”

To assist financial planners to digest the details of the Budget and to provide insight into the ways in which clients may be impacted, Dante De Gori will be holding a webinar for FPA members and non-members alike at 1pm on Wednesday 14 May. Attendees will have an opportunity to ask questions live during the session and can also access the recording after the session has been completed.

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Brad Fox

The Abbott Government’s first Budget will significantly impact many groups of Australians who will need the benefit of financial advice in order to navigate their way through the changes and maximise their personal financial position, according to the Association of Financial Advisers (AFA).

AFA CEO Brad Fox says the impact of the Budget measures, which at a high level are designed to spread the load of reducing the Budget deficit across nearly all adult Australians, will hit welfare recipients and middle income families hardest. “These families will have less disposable income and this may affect their ability to afford vital personal insurance,” he says. “They may also have less capacity to fund financial investments, reduce personal borrowings or make additional contributions to super.”

Mr Fox also says that for Australians born after 1965, who are seeking the freedom to retire before age 70, there is now a compelling reason to build assets outside superannuation. “The age at which people born after 1965 can access the age pension is being lifted to 70, so we may see the preservation age – that is, the age at which people can access their superannuation – also raised to 70 in subsequent budgets,” he says. “This is one of the most compelling reasons yet for Australians to get financial advice on how to build investments outside the superannuation environment.”

Mr Fox says it is pleasing to see that the pre-election promise to not make adverse changes to the superannuation system has been honoured. “Bringing legislative stability to superannuation is essential to building trust and confidence in superannuation as the preferred savings vehicle to fund retirement.”

Reductions in spending on ASIC and the ATO announced in the Budget may also have implications for the financial advice industry, according to Mr Fox.  “As financial advice continues its progression towards becoming a universally recognised profession, the opportunity for greater self-regulation will increase. Reduced funding for ASIC, as the regulator of financial advice, may provide further impetus to bring this forward,” he says. “We expect the Financial System Inquiry to provide further opinion on the appropriateness of self-regulation.”

Mr Fox says reductions in welfare support to those under the age of 30 may increase the reliance on parents of the ‘boomerang’ generation – young Australians who move out and then go back into their parents’ homes as they struggle to establish their own financial independence.

“This Budget provides clear evidence that Australians need to take control of their own financial position and their preparations for retirement,” Mr Fox says.  “We urge all Australians, particularly those over the age of 50, to take action now and develop a serious plan for self-funding retirement – because you can’t rely on Government. If this Budget is likely to reduce your income it can seem challenging to think about saving for retirement. But the sooner you take action, the greater your chances are of attaining the security in retirement that you deserve.”

The AFA will continue to assess the detail of the Budget and make further statements once the full impacts have been assessed.

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George Boubouras

Investors will need to prepare for their retirement, regardless of the tough measures brought down in the Federal budget, and the focus on dividends is set to remain a feature of pre and post retirement planning, says Equity Trustees chief investment officer, George Boubouras.

“The current economic and political conditions only serve to drive additional investor demand for yield,” Mr Boubouras says.

“The increased emphasis on self reliance in retirement, combined with the ageing demographics and low interest rate environment, mean investors will continue to need a reliable income stream, in the form of franked dividends, from their equity portfolios.”

It is not only retirees who will benefit from a reliable source of income from growth assets.

“Exposure to growth assets, with consistent reinvestment, in the years and decades prior to retirement, will go a long way to meeting retirement income expectations,” Mr Boubouras says.

“The performance of the local equity market, with its tax paid dividends, combined with continued low interest rates, means Australian investors are already accustomed to targeting equity investments that pay a consistent dividend stream over time.

“Importantly, the Australian equity market has historically recorded a higher payout ratio compared to international equity markets, a fact which has rewarded those who invest in the local market.”

Mr Boubouras says an equity portfolio focused on yield will be trading off higher future earnings growth for a higher dividend yield.

“Currently equity market yields are 4.6 per cent. Investors who are focusing on the dividend yield, should be targeting an equity portfolio that is returning a yield of 7.5 per cent, once grossed up for franking credits.

“That is an attractive return for partially or fully self funded retirees.”

He says the sectors set to benefit from this search for yield include telcos, utilities, infrastructure, gaming, consumer staples, banks, diversified financials and listed property trusts.

Mr Boubouras says the tough budget will initially be contractionary, meaning it is less likely that the Reserve Bank of Australia (RBA) will raise interest rates in the near future. Additionally, the high Australian dollar will continue to place pressure on Australian companies.

“The current economic situation, combined with the measures brought down in the Federal budget, mean the RBA is likely to keep rates steady at least until 2015.

“This lower rate for longer outlook will ensure investors will continue to search for more yield elsewhere. Those ASX listed companies providing strong, sustainable yields, greater than the ASX200 over time, are set to benefit,” Mr Boubouras concludes.

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• After a 2013-14 deficit of $49.9bn, the budget deficit for 2014-15 is now projected to be $30bn, down from $34bn in the Mid-Year Economic Fiscal Outlook (MYEFO). For 2015-16 the deficit is projected to be $17bn (from $24bn in MYEFO) and a surplus is now projected for 2019-20.
• Fiscal tightening includes welfare cuts, public sector rationalisation and tax hikes, but with some offset coming from increased infrastructure spending.
• The fiscal cutbacks are modest near term and only really start to impact from 2016-17. As a result, there is unlikely to be much economic impact in the year ahead.
• The impact on the share market is likely to be minimal.

Introduction

With the Government winning the election with a mandate to fix the budget, a bout of fiscal austerity was inevitable. Against this backdrop and the fears of the last few weeks, the Budget is not as tough as feared. Many of the budget savings will only build over time.

Key budget measures

Many of the measures announced in the budget come as no surprise. The key savings measures are as follows:

• a tightening in eligibility for family tax benefits (FTB), eg the income threshold for FTB-B reduced to $100,000 from $150,000 and to end when the youngest child is six;
• pensions to be indexed to inflation not wages, a pause in eligibility thresholds;
• a further increase in the pension age to 70 by 2035;
• a $7 co-payment for GP visits;
• a further 16,500 public sector jobs to go and the merging or elimination of numerous government agencies;
• the resumption of fuel excise indexation from August;
• a 2 percentage point increase in the top marginal tax rate which kicks in at $180,000 for three years;
• reintroduction of the work for the dole scheme;
• moves to increase the cost of higher education;
• the increase in the Superannuation Guarantee beyond 9.5% delayed till 2018; and
• reduced foreign aid spending.

There are several sweeteners though, eg using asset sales to fund infrastructure spending, the start of a new paid parental leave (PPL) scheme, funding for medical research, the planned abolition of the mining and carbon taxes, and a 1.5% cut to corporate tax next year to offset the PPL levy.

The budget bottom line

Beyond the projections for the current financial year (which look a bit too pessimistic), the budget deficit projections now look much healthier than those seen in MYEFO, with the budget deficit for 2014-15 now projected to be $30bn, down from $34bn in MYEFO.

Interestingly, despite all the talk of a tough budget, the actual additional policy tightening for 2014-15 is just 0.1% of GDP, but as the spending cuts build the impact rises to 0.6% of GDP by 2016-17 rising dramatically beyond that. See the red rows. Reflecting this, the turnaround in the 2017-18 deficit from 1.5% of GDP to now just 0.2% is substantial. The end result is that the budget is now projected to be in surplus by 2019-20 (versus deficits indefinitely in MYEFO).

Relative to MYEFO, the improvement initially reflects increased revenue and lower spending, but from 2018-19 owes mainly to spending (as savings build, the income tax hikes end and fiscal drag is assumed to be handed back).

Economic assumptions

The major economic assumptions underpinning the Budget are shown in the next table.

There is only fine tuning since the MYEFO forecasts and nominal GDP growth is projected to remain soft as the terms of trade weakens. We continue to think that the 2014-15 growth assumptions are a bit too pessimistic and they remain below the RBA’s 2.75% mid-point forecast. This partly explains why we are a bit more optimistic on unemployment.  

Assessment and risks

Australia does not really have a ’budget emergency‘: the budget deficit has not come anywhere near the 10% of GDP plus levels that sparked concern in the US, parts of Europe and Japan. Net public debt at 16% of GDP is a fraction of what it is in the US (82%), the Eurozone (73%) and Japan (137%); ratings agencies are not downgrading our AAA rating and bond yields remain low.

That said, the budget is always about balance and Australia does have a budget problem. After the biggest boom in our history, the budget should be in far better shape. Comparing ourselves to a bad bunch is not necessarily wise. In 2006 Ireland’s net public debt was close to where Australia’s is now and yet it skyrocketed when its boom turned to bust. Given our (albeit shorter) resources boom but 20 plus years with no recession we should be much closer to Norway which is running huge surpluses and negative net public debt (-205% of GDP). This was a major and valid criticism of the last few years’ budgets.

Against this backdrop, the 2014-15 Budget is a step in the right direction with the measures put in place to control spending growth over the medium to long term likely to put it on to a sustainable path. The Budget also gets a tick in terms of its focus on boosting infrastructure, reducing public sector duplication and renewed privatisation – all of which should help boost productivity over the long term.

There are three main risks though. First, the tax hikes and welfare cutbacks could drag on consumer spending. Fortunately, the Government has not front-loaded its savings and partly offset them initially by infrastructure spending.

Second, taking the top marginal tax rate to 49% (which will put it as the world’s 15^th highest and way above our neighbours, eg NZ 33%, Singapore 20%, HK 15%) is a backward step in terms of incentive and trying to discourage tax minimisation efforts. However, I have sympathy with the fairness rationale (although there would have been better alternatives such as reducing the capital gains tax discount).

Finally, there is a big risk that many of the budget measures will not pass through the Senate.

Implications for interest rates

While the fiscal tightening in the year ahead is less than feared at about 0.1% of GDP, it comes on top of 0.3% of tightening already in train from the previous Government (mainly the 0.5% NDIS levy). In addition, the scaling back of welfare access and the public sector could negatively impact confidence. So while we still see the RBA raising interest rates around September/October, there is some risk that rate hikes may be delayed into next year.

Implications for Australian assets

Cash and term deposits – the ongoing fiscal tightening means that interest rates will remain pretty low (even when they do eventually start to rise). Expect term deposit rates to remain at 4% or below in the months ahead.

Bonds – the measures to bring spending under control and provide confidence the budget will be returned to surplus will help ensure Australia’s AAA rating remains secure. This, plus additional fiscal tightening, albeit spread over time, and the risk rate hikes will be delayed till next year should help ensure bond yields remain low. But with five year bond yields at 3.2% it’s hard to see great returns from Australian sovereign bonds over the next few years.

Shares – the fiscal austerity in the Budget is only a minor headwind for profits. And against this, the increase in infrastructure spending, the reform inherent in public sector downsizing and privatisation and putting the budget on a sounder footing are long term positives and the Budget will help keep interest rates down. Overall, its impact is unlikely to be huge. Construction and building material stocks are likely to benefit, whereas it’s a slight drag for retailers.

Property – property prices are likely to continue gaining on the back of low interest rates, although momentum may slow a bit from last year’s surge in Sydney and Melbourne.

The $A – the announcements in the Budget alone are not radical enough to have much of an impact on the Australian dollar. Affirmation of the AAA rating is a positive while the dampening impact on long term growth from fiscal austerity is a drag. Not much in it really though. With the commodity price boom fading, the interest rate differential in favour of Australia having fallen and the Australian dollar overvalued on a purchasing power parity basis, the trend in the Australian dollar is likely to remain down.

Concluding comments

The 2014-15 Budget goes a fair way to getting the budget heading back towards surplus without going overboard with fiscal austerity for the next financial year. Better to start down the path though before any crisis hits, so when it does we will have greater fiscal flexibility.

Shane Oliver, Head of Investment Strategy & Chief Economist

———-

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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• Mild drag on growth—the Budget looks for a substantial shrinking of the deficit—from 3.1% of GDP in the current year, to 1.8% in 2014–15 and 1.0% in 2015–16. But this is only a mild ramp-up of policy tightening (0.1% of GDP in 2014–15, 0.3% in 2015–16) compared to what had already been laid out. While there is indeed a range of new savings measures in the Budget, a lot of this is offset by new ‘spending’ (on both the revenue and expenditure sides).

• Lower household income—a budget repair levy, changes to Family Tax Benefits, fewer benefits to job-seekers, the reintroduction of fuel excise indexation, a range of other initiatives spanning medical and senior citizens and an increase in higher education costs will all play a part in reducing household income. While these changes are more a 2015­–16 story than 2014–15, the sum of the above changes is roughly 1% of household consumption in 2013, a sizeable figure. Thus, it is expected to have an impact on consumer sentiment and spending.

• RBA required to support economy—the pressure on the RBA to increase interest rates will ease with this budget as it provides support for housing.

• Repeal the resources tax and the carbon tax—if this is achieved, it would deliver a mild boost for miners, and for carbon-emitting companies (e.g. steel, building materials, transport). It should be noted that all of the above measures will need Senate approval, which may not be straight-forward.

• Paid parental leave and a tax cut from small companies—the paid parental leave scheme will put some money back in consumers’ pockets. It is to be funded by a 1.5% levy on the profits on large companies. At the same time, the Government will lower the corporate tax rate by 1.5%, leaving the overall tax rate unchanged for large companies. Smaller companies thus enjoy a tax break.

• Lifting infrastructure spend—a combination of new funding and an asset recycling initiative (to encourage states to sell assets and reinvest) is expected to lift infrastructure spend by over $600m in 2014–15, and ~$1.5bn in subsequent years. This could provide support for contractors and building material companies.

Impact on the market

The tough budget was well flagged so it is likely that is has been absorbed by the market at this point and market action would suggest this is the case. From our portfolio perspective we see the infrastructure spend as having a positive impact on Lend Lease and Macquarie Bank, the likely impact on interest rates as being favourable for Stocklands and Dulux and the changes to the Medicare co-payments having a negative impact on Sonic Healthcare (albeit we do not think the impact will be substantial).

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John Brogden

The 2014-15 Commonwealth Budget will make a substantial contribution to restoring long term budget sustainability according to the Financial Services Council.

John Brogden, CEO of the Financial Services Council said: “The budget will control spending and secure growth. It’s also the first budget in years where superannuation has not been the target of tinkering.”

“Raising the pension age to 70 years by 2035 is an important, necessary and reasonable reform given the increasing life expectancy of Australians,” Mr Brogden said.

“Many Australians starting work today will live for more than one century. It is critical that the increased life expectancy of Australians is the driver for Age Pension and superannuation policy, so future generations of taxpayers are not burdened with the cost of an ageing population.”

“The government needs to match the Age Pension increase with an increase in preservation age to 65.”

Mr Brogden also said that keeping older people in the workforce is imperative if Australians are to self-fund their retirement.

He said having older workers in employment is important for the economy.

“Giving employers an incentive of $10,000 to hire older Australians who have been on income support for at least six months is a positive step towards ensuring people are employed for longer.”

“The retirement savings of Australians are increased by $200 billion for every year a person remains in the workforce,” Mr Brogden said.

The government has also paused the Superannuation Guarantee Charge at 9.5 per cent for another year until 2018.

“The government has delivered on its commitment to make no negative changes to existing superannuation arrangements,” Mr Brogden said.

“Importantly, they have committed to deliver on 12% super. However, the pause at 9.5 per cent for an extra year s disappointing.”

The FSC has welcomed the increase in the superannuation contributions cap to $30,000 per annum for working Australians under 50.

“This shows a commitment to help Australians self-fund their retirement,” Mr Brogden said.

“Superannuation is already doing its job saving the government $5.7 billion in Age Pension costs this year.”

At $1.75 billion, superannuation funds in Australia have an appetite to invest in infrastructure. The government has opened up an opportunity to build a pipeline of infrastructure investment for Australians.

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Consumer concerns ahead of Tuesday’s budget.

New consumer research findings ahead of the Federal Budget reveal that building up savings is the current top financial priority for Australians.

The research conducted for Australia’s leading specialist insurer TAL shows that saving is the top priority for all key demographic groups, with 100% of those aged 18-24 listing this as a current financial priority.

However, the next top current financial priority is spending money for leisure, even for those who are not working and those aged 50-69.

High on the list are saving for holidays and saving for retirement across all demographics, but pleasingly financial protection via life insurance is also high on the list, especially for generations Y and X (64% each).

TAL Group CEO Jim Minto said the findings show that while saving is the top priority, Australians are also adopting a “live for the moment” attitude by aiming to increase leisure spending and holidays above any other tangible financial outlays.

“These results from our ongoing research into consumer financial behaviour suggest people acknowledge the reality of needing to create greater personal independency by identifying saving and financial protection in the top five of 12 priorities. While doing this, they are clearly dreaming of and planning for the things they want to do while not working,” he said.

“In a way people are escaping from the perceived grind of financial pressure of everyday life, but I am pleased life insurance as a form of protection is high on the agenda of priorities because it means people understand how important it is.”

While building up savings is the top priority at 96%, 81% of people say the second priority is increasing funds available for activities such as dining out, theatre/cinema and other recreational spending. This is followed by saving for a holiday at 78%, saving for retirement (76%) and life insurance for financial protection (58%).

The poll was conducted among 1,266 Australians and it asked people to rate a number of financial goals as either ‘very important’, ‘quite important’ or ‘not at all important’ across 12 categories including buying a car, a home, new technology, retaining/reskilling, looking after dependents, children’s education and investment property.

Mr Minto continued: “While domestic budget pressures and those of the wider economy are clearly playing on people’s minds, Aussies have good times on the immediate horizon which is a good sign for the nation.”

Other key findings

• Improving the financial protection of family through life insurance is a top priority for 64% of Gen X and Gen Y, however Baby Boomers lag behind at just 46%.
• Younger generations rated fundamental requirements such as a job, car and home as higher priorities than older people, but saving for a holiday was almost equally represented as a top financial priority for Gen X (76%), Gen Y (80%) and Baby Boomers (78%).
• Retirement planning was also a key financial priority for the key generations: Baby Boomers (84%), Gen X (84%) and Gen Y (61%).

Table 1: The financial priorities of Australians (% rating as very or quite important)

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