The Budget Papers - What it all means

The Coalition has delivered a budget that could be the last of their term in office. There is plenty to mull over for investors with its forecasts on the state of the Australian economy and where the Government sees Australia going over the coming years in focus.

By Evan Lucas · 30 Mar 2022

By Evan Lucas ·
30 Mar 2022 · 5 min read

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Key economic points the government wants you to see:

Material reduction in the government’s deficits. Down $103.4bn over the coming five years compared to its Mid-Year Economic and Financial Outlook (MYEFO) which was only six months ago.

How have they done this you ask? An improved economic outlook from the terms of trade and income tax sees the expected tax revenue coming in $152.8 billion stronger than previously estimated.

The government is also trying to give you ‘upside surprise’ as some forecasts appear conservative such as the forecasting of the iron ore at US$55 a tonne and coal US$60 a tonne compared to current pricing of US$134 a tonne and US$320 a tonne - gives scope for further improvement in the deficits.
There is $40 billion of new spending the majority of which is new spending in infrastructure and policies to ease cost-of-living such as cutting the fuel excise tax in halved for six months a $420 cost-of-living tax offset for those earning up to $126,000 and a $250 payment for those on income support.
In the main what the government is trying to say is that the economy is strong, wages should grow, and government revenue (tax take) is stronger than expect.

However, what is hidden in all this is:

Inflation expectations are low compared to the market – at 4.25 per cent this year compared to external forecasts of 4.5 to 5 per cent. But its next year and the year after that appear optimistic with inflation falling to 3 per cent and then 2.75 per cent the year after. The overseas experiences suggest this is unlikely and will squeeze the forecasts for the deficits and Australia’s growth.
Wage growth – nominal wage growth (growth at current prices) is forecasted to rise solidly over the coming estimates rising by 3.25 per cent in 2023 and 2024. However real wage growth (growth including inflation) is negative this year and likely to be next year as well. So, are we just getting bracket creep with a side of lost purchasing power?

Inflation is going to be an interesting challenge for investors over the coming year(s) and clearly cash rates and coupon returns are going to be eaten up by these price increases. We suggest looking at our calculators to work through what increase inflation might mean for your longer-term returns. You can do that here

We also think it might be advantageous to look at strategies that can increase your longer term returns such as the bucket strategy, monthly contributions to improve the compounding effect and looking dividend reinvestment to help your total returns.

Have a look at these articles for more information.

An investment strategy for retirement
The Power of Compound Interest for Investing
Accounting for dividends

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Frequently Asked Questions about this Article…

How is the government planning to reduce its budget deficits?

The government plans to reduce its budget deficits by $103.4 billion over the next five years. This is largely due to an improved economic outlook, with tax revenue expected to be $152.8 billion stronger than previously estimated.

What are the key areas of new government spending?

The government is allocating $40 billion in new spending, primarily focused on infrastructure and policies to ease the cost of living. This includes halving the fuel excise tax for six months, a $420 cost-of-living tax offset for those earning up to $126,000, and a $250 payment for those on income support.

What are the government's inflation expectations, and how do they compare to market forecasts?

The government expects inflation to be 4.25% this year, which is lower than external forecasts of 4.5% to 5%. However, their projections for inflation to fall to 3% next year and 2.75% the year after are considered optimistic compared to overseas experiences.

What is the outlook for wage growth according to the budget?

Nominal wage growth is forecasted to rise by 3.25% in 2023 and 2024. However, real wage growth, which accounts for inflation, is expected to be negative this year and likely next year, indicating potential bracket creep and reduced purchasing power.

How might inflation impact investors in the coming years?

Inflation is expected to be a challenge for investors, as it could erode cash rates and coupon returns. Investors are encouraged to use calculators to assess how increased inflation might affect their long-term returns.

What investment strategies can help improve long-term returns in an inflationary environment?

To improve long-term returns, investors might consider strategies like the bucket strategy, making monthly contributions to enhance the compounding effect, and reinvesting dividends to boost total returns.

Where can I find more information on investment strategies for retirement?

You can explore articles on investment strategies for retirement, the power of compound interest, and accounting for dividends to gain more insights into effective investment approaches.

What is the significance of conservative commodity price forecasts in the budget?

The budget conservatively forecasts iron ore at US$55 a tonne and coal at US$60 a tonne, despite current prices being much higher. This conservative approach provides room for potential improvements in budget deficits if actual prices remain elevated.