Federal Budget 2024

As good as it gets?

• For the second year in a row, the Federal Government is on track to deliver a budget surplus. This is a positive development given the Reserve Bank of Australia (RBA) is trying to slow demand in its fight against inflation.
• However, the outyears show increasing budget deficits, reflecting structural spending pressures such as the NDIS, defence, aged care and health. Some progress has been made with the NDIS, but not others.
• This budget has very limited implications for the financial markets. Most of the new spending initiatives and the tax cuts were flagged in the lead up to budget night and even the future deficits are relatively small relative to gross domestic product (GDP).
• Cost-of-living pressures are being addressed by providing personal income tax cuts and rebates on household essentials such as rent and electricity, and extending the instant asset write-off for small business.
• In FY24 the budget position is expected to be a surplus of $9.3bn, up from a deficit of $1.1bn at the Mid-Year Economic and Fiscal Outlook (MYEFO). However, the late surge in revenue is about as good as it gets, with a deficit of $28.3bn expected in FY25 and a deficit of $42.8bn in FY26.
• The budget forecasts inflation to slow to 3.5% at the end of FY24 and 2.75% by the end of FY25. This is well below the RBA’s forecast of 3.8% in FY24 and 3.2% in FY25. The difference can be mostly explained by the extension of the electricity rebate, which is expected to reduce inflation by 0.5%pts. However, this is only a temporary measure and issues such as capacity utilisation are much more important for underlying inflation.
• GDP growth is downgraded from 2.25% to 2.0% in FY25 vs the RBA’s forecast of 2.1%. In the past few budgets, the forecast of the terms of trade have been too low and the better than-expected actual outcomes helped prop up the budget position. In FY25 the terms of trade is expected to fall by 7.75%.
• We doubt the shorter-term initiatives such as the tax cuts, the energy rebate and the increase in rental assistance will support a sustained turnaround in consumer spending. Spending will probably gravitate towards non-discretionary items such as food and essential services. It is also likely that at least a portion of the tax cuts will be saved.
• Even though the Stage 3 tax cuts have been broadened we don’t think they are large enough to have a meaningful impact on inflation. The RBA’s main aim is to bring the labour market back into balance. Progress has been made, but more needs to be done and at this stage that means immediate interest rate cuts are off the agenda.

Only one more surplus…

A stronger than expected labour market and higher than expected commodity prices have helped the budget position. In FY24 the budget position is expected to be a surplus of $9.3bn, up from a forecast deficit of $1.1bn at the MYEFO. The deficit in FY25 is expected to be $28.3bn and in FY26 it is expected to be $42.8bn.

Key Fiscal and economic forecasts

Over the longer-term deficits are expected to be persistent but not large and mostly reflect structural budget pressures from defence, the aging population and the NDIS.

Underlying cash budget position % of GDP

Aims of the Budget

The key aim of the front end of the Budget is to assist with cost-of-living pressures, without adding to inflationary pressures. But the longer-term tail of the budget is more focused on growth and spending.

Given regional geopolitical pressures, defence spending is a key priority. Other structural budget pressures come from the NDIS, the ageing population, and interest rates costs rising from record lows.

Major Budget initiatives

We review the major initiatives below:

Cost-of-living pressures

• A second round of power bill discounts is included in the budget. This year $3.5bn will be provided to households and small businesses via a rebate and follows $3bn in rebates last year.
• Commonwealth rental assistance will be increased by $1.9bn, which is equivalent to a 10% increase on the current settings.
• The community pharmacy agreement will be expanded by $3bn to fund a freeze on the Pharmaceutical Benefits Scheme (PBS), which normally rises with inflation. A five-year freeze will also be applied to pensioners accessing the PBS.
• $290m is set aside to extend the instant asset write-off for one year.

Personal income tax

Changes to stage 3 tax cuts

Housing

• $6.2bn in payments to the states for investment in social and affordable housing, homelessness and crisis support. This represents funding for an existing program due to expire in FY24. Within this the Federal Government’s contribution to fund the homeless increases from ~$200m to $400m – an additional $200m per year over four years.
• $1bn to the states for housing infrastructure via the National Housing Infrastructure Facility, of which $700m is for crisis and transitional housing projects.
• $2bn to the states for housing infrastructure and to speed up home-building processes.
• More than $90m on education and training to increase the number of skilled construction workers.

Future Made in Australia agenda

• Around $8bn will be invested in renewable hydrogen over the decade including a $6.7bn tax incentive.
• Onshore refining of critical minerals will be boosted by $8.8bn including $7bn in direct tax incentives.
• Investment in Quantum computer development ($466m). The Federal Government will invest in the Silicon Valley start-up PsiQuantum which has plans to design and build the world’s first commercially useful quantum computer in Brisbane.
• A $566m increase in funding for Geoscience Australia. Some of this investment will be used to identify deposits of critical minerals and rare earths that are needed to develop renewable energy technologies.

Agriculture

• A $519m boost to the Future Drought Fund to help farmers and regional communities prepare for drought and improve climate resilience.

Defence

• The Government is investing an additional $50.3bn over ten years to implement the 2024 National Defence Strategy.

Welfare

• Extension of the two-year freeze on deeming rates or phasing in a higher rate for 857,000 welfare recipients amid calls for more cost-of-living relief.
• Payment of superannuation on the 20 weeks of government-funded parental leave from July 2025. Parents of babies born on or after this date will receive 12% in addition to their government-funded parental leave (benefits around 180,000 families).

Education

• Student debt will be reduced by $3bn by changing the indexation of the HECS debt increase.

Infrastructure

• Infrastructure investment will be increased by $9.5bn over the forward estimates.
• An investment of $2.2bn to service the infrastructure needs of South-east Queensland.
• Growth areas in Western Sydney will receive $1.9bn billion in funding for 14 infrastructure projects, in particular the transport corridors to the new Western Sydney Airport.

Budget savings

• The Government has identified $27.9bn in savings and spending reprioritisations, of which paring back the growth of the NDIS will contribute $14bn over four years.