Treasurer Jim Chalmers’ first Budget was delivered against a backdrop of continuing turmoil on the global economic front, reflected in market volatility.
The video below takes you through an overview of the Australian economy and stock market movements during the past month.
In his first Budget, Treasurer Jim Chalmers’ emphasised the three Rs – responsible budget repair and restrained spending, right for the times.
For good measure, resilience also got a mention with spending targeted at building a more modern economy to deal with the challenges ahead.
This is the first budget from a federal Labor government in almost a decade, barely five months since Labor was elected and seven months since the Coalition’s pre-election budget in March, so it was bound to be a little different. The Treasurer used the opportunity to update the shifting economic sands and reset spending priorities to align with the new government’s policy agenda.
For Australians wondering what the Albanese Labor government will mean for them and their family, this is the first piece of a puzzle that will be completed over the next three years.
The Labor government has inherited an improving bottom line, with the deficit for 2022-23 expected to come in at $36.9 billion, an improvement of more than $40 billion on the pre-election forecast. This was due to high commodity prices for our exports and higher tax receipts from a strong labour market and robust corporate profits.
The deficits of $224.7 billion previously forecast for the next four years have shrunk to $182 billion. The difference of around $40 billion will go towards funding the government’s election promises and budget repair.
Labor has also found $22 billion in savings by cancelling or redirecting programs planned by the previous Coalition government, and a further $3.6 billion in cuts to external consultants, marketing, travel and legal expenses. Savings will also come from clamping down on tax avoidance by individuals and foreign corporations.
But as the Treasurer is fond of saying, storm clouds are looming, and he singled out inflation as the biggest challenge.
Inflation is forecast to peak at 7.75% by year’s end, before returning to 3.5% in 2023-24. Despite low unemployment currently at 3.75% it is tipped to rise to 4.5% by 2023-24, the surge in inflation means wages are unlikely to grow in real terms until 2024 at the earliest. Wages growth is forecast to be 3.75% in 2023-24, overtaking inflation of 3.5%.
With more interest rate hikes expected to tame inflation, debt is also set to climb from $895.3 billion last financial year to a forecast $927 billion in 2022-23 and upwards over the forward estimates.
With global economic headwinds building to gale force, Australia’s economic growth is expected to slow as cost-of-living pressures bite into household budgets.
While Dr Chalmers does not expect Australia to slide into recession like many of our trading partners, economic growth is already slowing. Real gross domestic product (GDP) is forecast to be 3.25% in 2022-23, down from 3.9% last financial year, and 1.5% in 2023-24, 1 percentage point lower than predicted in the March Budget.
Childcare and improved parental leave are a priority area for the new government, in an effort to support families, reduce cost-of-living pressures and improve women’s workforce participation.
Already, $4.7 billion has been earmarked for childcare over the next four years, with families earning less than $530,000 to receive extra childcare subsidies from 1 July 2023. An extension of paid parental leave from the current 18 weeks to 26 weeks is also set to be phased in from next July, so neither initiative will add to the current Budget.
Pressures on the federal health and aged care budget are mounting in the wake of COVID and an $8.8 billion blowout in the NDIS budget which will reach $166.4 billion over four years. An extra 380 staff will be hired at a cost of $158.2 million to speed up claims and make the system more efficient.
$750 million will be spent strengthening Medicare and $235 million over four years to roll out Urgent Care Clinics to reduce pressure on public hospitals.
Following revelations from the Aged Care Royal Commission and lessons learned during the pandemic, the government has pledged to fund an increase in aged care workers’ wages.
And the cost of subsidised prescription medications will be cut from $42.50 to $30 from January 1, at a cost of $756 million over four years.
A centrepiece of the Budget to improve housing affordability and chronic shortages is a new Housing Accord to build 1 million new houses in five years beginning in 2024.
The new $10 billion Housing Australia Future Fund will provide a sustainable funding source to increase housing supply, including 20,000 new social housing dwellings, 4,000 of which will be allocated to women and children impacted by family and domestic violence and older women at risk of homelessness.
The plan paves the way for significant public and private investment in new housing across the country, following an historic agreement between the federal government, the states and private investors including superannuation funds.
Federal, state and territory governments have committed to a $1 billion one-year agreement to deliver 180,000 fee-free TAFE and community-based vocational education places from January 2023. Support will be targeted to priority groups, including First Nations people, and priority areas such as care sectors.
The government will also create 20,000 more subsidised university places over 2023 and 2024. The initiative will be targeted at disadvantaged groups to study courses where there are skills shortages.
As part of its budget review, the government will ‘’realign” $6.5 billion of existing infrastructure spending. It will spend $8.1 billion on key infrastructure projects including the Suburban Rail Loop East in Melbourne, the Bruce Highway and other important freight highways.
The government has also committed to at least $40 billion in new borrowing to set up funds and companies to invest in policy promises. These include the $20 billion Rewiring the Nation Corporation to invest in the electricity grid, $15 billion National Reconstruction Fund for local manufacturing and the $10 billion Housing Australia Future Fund to invest in social housing.
In an acknowledgement of the increased frequency and severity of natural disaster, up to $200 million per year will be set aside for disaster prevention and resilience.
A more comprehensive approach to climate change is also back on the agenda, with total climate-related spending of $24.9 billion over 2022-23.
As many of the nation’s largest emitters are in regional areas, the government will establish a $1.9 billion Powering the Regions Fund to help transition regional industries to net zero. And $345 million will be made available to increase uptake of electric vehicles.
What’s not in the Budget is also important. There was little new spending to help retirees and welfare recipients, but pensions and payments will increase due to indexation.
As previously announced, the amount Age Pensioners can earn before they begin to lose pension entitlements will temporarily increase from $7,800 to $11,800 this financial year.
While most superannuation fund members will welcome the lack of tinkering to the super rules, the investment potential of the new affordable housing initiatives should provide a valuable source of income to super funds and their members.
The Treasurer pledged a record investment of $1.7 billion to support implementation of the new National Plan to End Violence Against Women and Children. This will include funding for 500 new frontline service and community workers to support women in crisis.
The Government is also legislating 10 days of paid family and domestic violence leave for all types of employees.
The next 12 months are likely to be challenging for the economy and for households trying to budget for rising prices and interest rates, including higher mortgage repayments, at a time when home values are falling and real wages are going backwards.
The Treasurer has tried to walk a fine line between budget repair and responsible spending with long-term economic benefits for individuals and the nation.
Coming just months after the federal election, this Budget should be seen as laying the groundwork for the three Budgets to follow.
Information in this article has been sourced from the Budget Speech 2022-23 and Federal Budget Support documents.
It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.
Watch the video below to learn about October’s economic updates and market movements.
With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?
The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.
Some of the things you need to weigh up before committing your hard-earned cash include:
The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.
This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent. i
When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.
In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.
Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.
Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.
For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.
These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.
Tony and Elena, both 60, would like to retire in the next few years. Together they earn $180,000 a year, excluding super, but they still have $100,000 remaining on their mortgage. Tony has a super balance of $600,000 and Elena has $200,000.
They want to be debt free by the time they retire but they are also worried they won’t have enough super to afford the lifestyle they look forward to in retirement.
If they do nothing, at a mortgage interest rate of 4.5 per cent it will take five years to repay their mortgage with monthly mortgage payments of $1,864. At age 65, their combined super balance will be a projected $1,019,395.
Jolted into action, they decide they can afford to put an extra $1,000 a month into their mortgage or super.
These are complex decisions, but whichever option they choose they will probably need to consider working until at least age 65 to be debt free and build their super.
All calculations based on the MoneySmart mortgage and retirement planner calculators.
As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.
Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.
i https://www.finder.com.au/the-average-home-loan-interest-rate
ii https://www.chantwest.com.au/resources/super-members-spared-the-worst-in-a-rough-year-for-markets/
Most Australian employees have some form of life insurance, often through their superannuation fund, but many of us tend to ‘set and forget’.
To make the most of your life insurance policy, it’s useful to understand how it works, and how premiums and payments are affected by tax.
Life insurance is an umbrella term for a range of policies that cover different situations. They include:
The premiums for most types of life insurance are not tax deductible, but there are exceptions. Premiums for income protection held outside of super are tax-deductible and inside super for the self-employed. Business expenses insurance premiums are also tax deductible.
The tax treatment of benefits paid out by policies also varies according to the type of policy and your situation, so it’s important to talk to us. Generally, life cover paid to someone who’s financially dependent on you (typically a spouse and children under 18 years) is not taxed. But if the beneficiary isn’t your financial dependent, they can expect to pay tax.
Income protection insurance payments must be declared on your tax return and will be taxed at your marginal rate, just like your usual salary. Business expense insurance payouts also taxable.
Lump sum payments made through other policies are not taxable.
Some of these insurances, particularly life cover, income protection and TPD, can be purchased through your super fund. Most people have a basic level of cover held this way, but you should check to see if it’s adequate for your needs.
If you are aged under 25, have a super balance of $6,000 or less, or your account is inactive, you will need to “opt in” if you want insurance cover.
If you have a self-managed super fund (SMSF), you’re required to consider whether to hold life insurance for each of the fund’s members, although there’s no obligation to buy.
You’ll need to do the sums for your circumstances, which is where an adviser can assist, but there may be an advantage to using your super to pay the premiums. The main reason is cost.
Sometimes, the buying power of larger super funds allows them to negotiate competitive pricing for insurance products.i It’s not always the case, so you’ll need to shop around to make sure you’re getting the best deal.
Another potential financial benefit in paying the monthly premiums out of your super account, is that you’re using funds taxed at 15 per cent. Whereas, if you pay the premium from your own bank account, you’d be using funds already taxed at your marginal tax rate, which may be higher. That means your pre-tax dollars are working harder and you’ve still got your cash in the bank.
The main drawback to paying insurance premiums through super is that you’ll be reducing your super balance, which means less for retirement. However, you could choose to boost your balance using salary sacrifice or personal contributions.
Deciding on the type of life insurance you need can be tricky, so give us a call to discuss your insurance needs.
i Insurance through super – Moneysmart.gov.au