The 124th Australian Federal Budget was delivered by Dr. Jim Chalmers. He presented an optimistic view of Australia’s finances, highlighted by a second consecutive surplus—this year, a surplus of $9.3 billion. This marks the first time the country has achieved back-to-back surpluses since before the global financial crisis over 16 years ago.

A portion of this surplus will fund the Stage 3 tax cuts, which are expected to inject an additional $20 billion into the Australian economy in the first year alone.

Interestingly, though not surprisingly, Dr. Chalmers is forecasting a much more optimistic inflation outlook, estimating that it will fall within the RBA’s target range of 2-3% by the end of the calendar year—significantly sooner than the RBA’s own projections.

There is far too much information from the budget to adequately cover in depth for everyone, but here are our viewpoints in relation to what will impact Vista clients.

The Good

Cost Of Living – The primary purpose of this budget was to assist with the cost of living without detrimentally impacting inflation. This budget has some “clever” schemes to it, especially the $300 energy bill rebate and an increase to Rental Assistance which will cost the budget approximately $5.5 billion. However, it will directly reduce inflation numbers by an estimated 0.5% when combined with the already announced Stage 3 tax cuts. It is the first time in recent memory that a government has attempted to artificially impact inflation numbers, and it will be interesting to see if it works or not.

Student Debt Indexation Reduction – It was previously announced that there would be a change in methodology regarding how HELP debt indexation was calculated. The indexation of student loans will now be calculated based on whichever is lower between the Consumer Price Index (CPI) or the Wage Price Index (WPI). This would bring the estimated indexation rate for 2024 down from 4.7% to 4.0%.

However, what is surprising is that they will backdate this change to 1 June 2023, meaning that last year’s indexation will be adjusted down from a record high of 7.1% to 3.2%. We are unsure how this will be practically implemented, especially for those who have recently cleared their HELP debts since 1 June 2023.

Aged Care – A total of $2.2 billion has been allocated to deliver aged care reforms and continue implementing recommendations from the Royal Commission into Aged Care Quality and Safety. The new Aged Care Act, which is central to these reforms, will focus on putting the rights and needs of older people at the heart of the aged care system. Another half a billion dollars will be spent next financial year to release 24,100 more home care packages.

The Bad

The Future - The budget forecasts a minor surplus for the current year but predicts sizable deficits for the next two years. For the 2024-25 financial year, a deficit of $28.3 billion (1% of GDP) is projected, which is expected to increase to $42.8 billion (1.5% of GDP) the following year. These deficits are larger than those previously projected in the midyear economic and fiscal outlook.

The outlook for future economic growth is also not very promising. The 2024 federal budget projects that Australia’s real GDP will grow by 1.5% in 2023-24 and then maintain at least a 2% per annum growth rate over the forward estimates. Currently, the annual GDP growth rate for Australia stands at 1.5% for Q4 2023.

Given that Canberra often overestimates future growth, the assumption of relatively stagnant future growth is somewhat concerning. This could imply that an economic contraction over the short term is a likely scenario.

Investors, Superannuation, and Retirees – While it may be premature to label this aspect as “bad,” the absence of major policy announcements related to investments is notable. Some individuals may welcome the “status quo,” while others may see it as a missed opportunity to improve retirement outcomes.

As previously announced, stage three tax cuts will take effect on 1 July2024, providing all taxpayers with a reduction in tax payable. However, for those on higher taxable incomes, this tax reduction has been scaled back. The Superannuation Guarantee Contribution will increase from 11% to 11.5% from 1 July 2024, as part of the ongoing plan to raise employee super contributions to 12%. Additionally, contribution caps to superannuation will see a slight increase in the next financial year. The deeming rate freeze for Centrelink will remain at 2.25% throughout the next financial year.

However, the lack of policy announcements aimed at enhancing retirement outcomes is a concern, warranting its placement in the “bad” category.

The Ugly

Student Nurses and Teachers – Initially, I (Chris) was elated to learn that trainee teachers, nurses, midwives, and social workers would receive mandatory payments for their placements, signaling an end to “placement poverty.” However, the details reveal some concerns. The stipend is a modest $320 per week—equivalent to $8 per hour for a 40-hour work week—and it’s subject to means testing. Moreover, this policy won’t be effective until 1 July2025.

In comparison, industries such as finance, public service, or construction offer significantly higher wages. For instance, the 2022 CMFEU Apprentice Agreement in Victoria indicates that a first-year carpenter apprentice earns $702.01 per week for the initial three months, which then increases to $882.21 per week. This disparity highlights the challenges faced by student nurses and teachers.

Victorian State Budget – While not part of the federal budget, Victoria’s debt situation is concerning. In 2022, Victoria’s debt was larger than the combined total of NSW, Queensland, and Tasmania. Additionally, Victoria has seen the largest increase in public servants compared to its overall population growth. These figures suggest that Victoria has one of the highest debt levels, both in absolute terms and relative to its economic size. The state’s financial strategy will need to address these debt levels while balancing economic growth and public service delivery. Coupled with the migration from Victoria to northern states and reports of cost-cutting required in hospital and education settings, this indicates that investing in Victoria, particularly in property, carries significant short-term risks where caution is advised.

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Reference: If you want to obtain more information about the 2024 Federal Budget, please check out our Licensee Count's analysis here.