Anaemic growth and a conservative budget

The Reserve Bank’s decision to cut interest rates by 25 basis points and Scott Morrison’s conservative first budget came as no surprise to the market, after CPI contracted for the first time in seven years. 

Australia is currently experiencing an extended period of modest economic growth as it moves into a post-mining boom, globalised, high-tech, service-dominated economy.  Indeed, the consumer price index (CPI) contracted by 0.2% to 1.7% in the three months to the end of March[1]. This negative quarterly inflation, combined with factors such as the nation’s diminishing terms of trade, contributed to May’s rate cut[2].

Both Standard and Poor’s and Moody’s stated that Australia’s AAA credit rating remains secure[3]. Both companies did note that they would be closely reviewing the details of the budget in the coming weeks[4].

Standard and Poor’s reported, “Our current rating on Australia is AAA/Stable…As we’ve previously highlighted, improving budget balances remain important to the rating to offset Australia’s high vulnerability to shifts in offshore financial market sentiment[5].”

This is a sentiment that the Treasurer appears to share, in handing down his first budget Scott Morrison told Parliament now was not a time to be “splashing money around”, and noted international “headwinds and fragility[6]“.

However, Mr Morrison also noted, “At 3 per cent, our economy has grown faster than the world’s major advanced economies, faster than the United Kingdom, the United States, Japan and Germany. We are growing more than twice as fast as Canada, faster than New Zealand and Singapore, and matching it with economies like South Korea[7].”

Property is the ‘big winner’

While Mr Morrison’s budget speech addressed job creation, personal and company tax changes, defence spending and the Tobacco excise, according to Switzer commentator, Paul Rickard, the real winner of both the budget and lower inflation is the property market.[8]

In his budget speech, Mr Morrison announced a $1.6 million cap on the amount people can transfer into tax-free retirement phase super accounts, a lower threshold for the 30 per cent super contributions tax rate and a $500,000 lifetime cap on non-concessional contributions.[9]

It is anticipated that this will have an impact on the way people, and not just the wealthy, structure their investments.

Indeed, on Switzer Daily Mr Rickard suggested that middle income Australians will now invest monies that would otherwise have made their way into the super system, into the family home, investment properties and farms.[10]

In his budget speech Mr Morrison stated, “The transfer balance cap, lifetime non-concessional cap and the 30 per cent contributions tax for those on high incomes will each affect less than 1 per cent of superannuation fund members.[11]

Mr Rickard agrees, saying, “Super was never a vehicle for the rich. Tuesday night, super was an attractive proposition for the well-off… The well-off, or soon to be well-off, will look at investments outside the super system, with property, including negatively geared property, an obvious beneficiary.”

Deloitte’s private superannuation tax partner John Randall was quoted by the ABC as saying,”[We] may see a scramble to adjust investment plans given that existing investors are not grandfathered from the new $1.6 million cap[12].

“This amount will be indexed in $100,000 increments. However if you are already in pension phase and you have exceeded this level, you will have to move the excess monies back from your superannuation accounts from 1 July 2017, [13]” he said.

“This will pose administrative challenges for both members and administrators, especially for those individuals with multiple accounts.[14]