The Labor government’s election prospects will depend on the perceived success of these signature policies
The upcoming budget provides several business opportunities for B2B firms. The government’s infrastructure and housing investments that are already under way will be a continued source of demand over the medium term. To capitalize on these opportunities, align your product offerings with the government’s objectives of efficiency and cost-effectiveness. Moreover, due to the labor shortages in the construction sector, solutions that increase productivity or require minimal manpower will be winners. Finally, while the Future Made in Australia (FMIA) plan presents demand opportunities in the mining, renewables, and manufacturing sector, the funds dispersed will be minimal in the first few years and then rapidly ramp up. The longevity of the FMIA plan will also depend on the Labor government staying in power; thus, an optimal strategy would be to evaluate potential opportunities created by the plan and only act on them once the election outcomes are confirmed.
The cost-of-living relief measures will only provide marginal benefit to consumer spending in 2024–2025. Households will remain stretched under the pressures of rising food, housing, and mortgage costs until the end of the year, with only a slight uptick in demand expected in Q4 2024.
Lastly, firms should prepare for increased regulation and oversight from tax authorities. As this is becoming a politically charged issue, firms may need to invest a greater amount of time and resources to display their tax compliance.
Overview
Last week, the Australian treasurers delivered the federal budget for FY 2024–2025. The budget increased by 6.3% YOY to a total of AUD 734 billion. The key highlights of the 2024–2025 budget are as follows:
- Cost-of-living support: In addition to the reform of the Stage 3 tax cuts announced in January, the government has included several policies in this year’s budget to ease cost-of-living pressures. All Australian households will get an energy rebate of AUD 300, and 1 million small businesses will receive a similar rebate of AUD 325. The maximum government rent assistance for lower-income households will increase by 10% (this follows a similar increase of 15% from last year’s budget). Finally, the budget also includes AUD 3 billion in funding to freeze the co-payment cost of medicines on the Pharmaceutical Benefits Scheme (PBS) at AUD 31.6 until 2026.
- Future Made in Australia (FMIA): The signature policy of this year’s budget is the FMIA plan. AUD 22.7 billion will be spent on the project over the next 10 years. AUD 6.7 billion will be used as production subsidies for hydrogen production. AUD 7 billion will be put toward refining and processing the 31 critical minerals identified by the government. The government will also invest AUD 500 million to map new sites for mining critical minerals. AUD 1.7 billion will be used as an innovation fund to finance R&D of clean energy technologies. Earlier this year, the government also committed AUD 1 billion to the Solar Sunshot program to incentivize domestic production of solar panels. The plan also includes production incentives for clean manufacturing, green metals, and low carbon fuels (e.g., sustainable aviation fuel).
- Healthcare: The budget includes AUD 8.5 billion in funding for additional investments in the healthcare sector. AUD 3.4 billion will go toward listing new medicines on the PBS. The government will also spend AUD 1.4 billion over the next 13 years on the Medical Research Future Fund. AUD 227 million has been earmarked to establish 29 more urgent care clinics across the country. AUD 56 million will also be put toward women’s health initiatives, such as additional access to menopause and miscarriage treatments and contraceptive devices. The budget also includes AUD 2.2 billion to improve aged care, with plans to build 24,000 new home care centers. Finally, AUD 888 million will be spent on a new mental health initiative that will be rolled out from 2026.
- Defense: Defense spending will increase by AUD 5.7 billion over the next four years, as funding for the AUKUS nuclear-powered submarine project is set to ramp up. Other spending initiatives also include expansion of the navy, investments in long-range strike capabilities, and enhancements to northern military bases.
- Infrastructure: Public transportation infrastructure remains a key priority for Canberra. This year’s budget includes AUD 3.3 billion for various rail projects across the country such as Metronet in WA, and the Sunshine Coast rail line in Queensland. Funding for roads will also remain robust with over AUD 6 billion going toward new projects and upgrades. AUD 60 million will also go toward expanding the nation’s EV charging network. Addressing the nation’s housing shortage is another infrastructure priority for the government. AUD 6.2 billion will be invested in public housing (part of the government’s 10-year public housing plan of AUD 32 billion) in FY 2024–2025. AUD 1 billion will also go to the states to invest in housing-related infrastructure such as sewage and utility networks. AUD 89 million will be used to provide training for housing workers, as part of of efforts to address labor shortages in the sector. Finally, AUD 423 million will be invested over five years for social housing and homelessness services.
- Tax reform: The tax avoidance task force that was established in last year’s budget will continue for another two years. The task force will investigate tax avoidance from multinationals, large businesses, and wealthy individuals. The government will also aim to boost revenues by broadening the capital gains tax on foreign individuals and extending compliance programs to deter underreporting of corporate or personal incomes. The government will also extend the instant asset write-off scheme for small businesses, offering firms tax deductions of AUD 20,000 per asset installed between July 1, 2023, and June 30, 2025.
Our View
The federal budget for FY 2024–2025 did not contain any major surprises. The Labor government largely maintained policy continuity from last year’s budget, with the emphasis remaining on cost-of-living support, clean energy investments, and healthcare, among others. However, while the priorities of the budget remain unchanged, this year’s budget will have wide-ranging implications for inflation trends, the medium-term health of government finances, and of course, next year’s elections.
Inflation: Since the budget announcement last week, the government has faced criticism that the cost-of-living support that it is providing will stoke the fires of inflation once again. This is because the budget delivers energy rebates to all households while also lowering taxes for over 80% of the population through changes to the Stage 3 tax cuts. While these are valid concerns, our expectation is that the budget will not be inflationary. In our analysis of the Stage 3 tax cuts, we showed that it will only have a marginal impact on household spending. Moreover, recent data has shown that household spending has stalled, and that unemployment rates are ticking up. In this landscape, the cost-of-living support is not likely to be large enough to meaningfully increase overall demand and subsequently, inflation. However, the inflation relief provided by the government may give the central bank cause for concern. The RBA has maintained hawkish inflation forecasts for some time, and the budget may add to those worries. So even in a scenario where the inflation does not add to inflation, it could lead to a delay in interest rate cuts as the central bank may want to maintain its cautious approach.
Budgetary surplus: The budgets for the last two fiscal years have delivered a surplus. However, the budget will go back into a deficit from FY 2024–2025. The government’s growing expenses due to its aging population and increasing defense and welfare commitments will continue to strain the budget. As there is little political appetite to sharply raise government debt levels, Canberra will maintain a cautious rather than expansionary approach to fiscal policy in the coming years. This attitude is reflected in the government doubling down on raising tax revenues by increasing funding for the Australian Tax Office. Policymakers want to ensure that they are maximizing government revenues and maintaining spending efficiency.
Elections: The Labor government has been facing falling approval rates since Q2 of last year, and the gap between it and the opposition has been narrowing. The Labor administration will hope that the budget’s cost-of-living measures, changes to the Stage 3 tax cuts, and vision for the Future Made in Australia will be enough to sway voters’ minds ahead of next year’s election. A change of government in Canberra will likely lead to reversals in some of the policies set out in this budget. The biggest change is likely to be an overhaul of the FMIA plan, as leaders from the Liberal-Nationals coalition have been vocal critics of the plan. The coalition leaders also want to put nuclear energy at the center of Australia’s energy policy, not renewables.
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