2014 Federal Budget
Tuesday, June 10, 2014
Australia is not really in a budget crisis. The budget deficit does 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%); we still hold our AAA rating and bond yields remain low.
Fiscal tightening in the 2014 Budged 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. Also, it is important to keep in mind that the budget measures are yet to pass through the Senate.
Here is a summary of key cuts.
• A Temporary Budget Repair Levy of2% will be payable on taxable incomes over $180,000 pa for the next three financial years.
• The levy will increase the Fringe Benefits Tax rate to 49% for three years, starting on 1 April 2015.
• Changes to HELP debts will increase the amount payable and payments will be made at lower income levels.
• The income thresholds determining the Private Health Insurance Rebate and Medicare Levy Surcharge will not be indexed for three years, starting on 1 July 2015.
• The Dependent Spouse and Mature Age Worker Tax Offsets will be abolished from 1 July 2014.
• People who make non-concessional super contributions from 1 July 2013 that exceed the cap will have the option to withdraw the excess amount plus earnings on the excess.
• The timeframe for increasing the Superannuation Guarantee contribution rate to 12% will be amended.
• The Age Pension age will gradually increase to 70. The Age Pension age will increase to 67.5 from 1 July 2025. It will then continue to rise by six months every two years, until the pension age reaches 70, by 1 July 2035.
• The deeming thresholds will reduce from 20 September 2017. The lowering of the thresholds will increase the amount of financial investments subject to the higher deeming rate. This will result in a reduction in Centrelink entitlements if the client is assessed under the Income Test.
• Eligibility thresholds for pension payments will be frozen for three years from 1 July 2017. Pension payments include: Age Pension, Carer Payment, Disability Support Pension, and DVA Service Pension.
• A range of changes to Family Tax Benefit – Part A and B will reduce the number of people who are eligible and, for some, lower the entitlements.
• The Commonwealth Seniors HealthCare Card thresholds will be indexed from 20 September 2014.
• The definition of income for the Commonwealth Seniors Health Care Card will be expanded. From 1 January 2015, an amount will be included in the income test, based on an account-based pension being subject to deeming.
Impact on Shares, Interest Rates and the Australian Dollar
In regard to Australian shares, overall the budget’s impact is unlikely to be huge. The fiscal austerity in the Budget is only a minor headwind for profits. The increase in infrastructure spending, 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.
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 could be a drag on the economy. 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.
For more Information contact Tim Maher at Maher Digby Securities Pty Ltd - Financial Advisers – AFSL No. 230559 (see advert Page 3). Ph: 07 5441 1266 The information contained in this article has also been devised from the 2014 Federal Budget Papers, Ministerial statements, associated materials, and our interpretation of them. This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs. You should assess whether the information is appropriate for you and consider talking with your financial adviser before making an investment decision. For more Information contact Tim Maher at Maher Digby Securities Pty Ltd - Financial Advisers – AFSL No. 230559