The Australian Federal Government recently handed down the 2024-25 Australian Federal Budget – it was all about a bigger government role and fiscal policy support. The government handed down a second consecutive surplus thanks largely to higher commodity prices and ongoing strength in the labour market. Below we discuss key components of the budget.
Big turnaround in fortunes
Australia’s exposure to key commodities continues to pay dividends, with the FY24 underlying cash balance improving from a $1bn deficit to a $9.3bn surplus – that is a turnaround of ~$10.3bn from the mid-year forecasts.
Along with commodities, tighter labour markets and higher personal income tax receipts also contributed to the turnaround. However, over the future estimates, the budget deficit is expected to widen.
Commodities are the driving factor
It is worth highlighting something important about commodity price forecasting. As investment analysts we have been covering commodities for over a decade and building forecasts for individual commodity companies such as BHP, RIO etc. We can assure you there are next to zero analysts who forecast commodity prices to increase year-on-year over the forward estimates in their forecast models.
Two simple reasons for this:
1) Most investors are conservative with their future forecasts because commodity prices are difficult to predict;
2) commodity prices are impacted by supply & demand – if prices rise more supply is introduced to take advantage of the higher prices which invariably leads to lower prices.
In the table below we have provided market’s forecasts for key commodities. If we take iron ore, the market is expecting a steady decline in prices over the next 2 years from current levels. However, these forecasts in previous years have been materially wrong. Therefore, we believe there is a material probability that the Australian budget continues to benefit from higher commodity prices which is currently not in the estimates.
Figure 1: Market forecast for key commodities
Source: Bloomberg, Banyantree
Australia’s lacklustre growth outlook
Australia’s economic growth is expected to be uninspiring over the medium term and is only expected to return to long-term average growth rates in 2027-28. Whilst some market commentators may attack the government for potentially handing down a stimulatory budget, in an environment the Reserve Bank of Australia (RBA) is trying to tame inflation and get on the easing monetary policy path to relieve mortgage pressure. The fact is if they don’t support economic growth, economic growth could materially moderate from current weak levels.
Weaker to flat household consumption is one of the key drivers of the current weakness in the domestic economy. If economic conditions moderate further, consumer confidence will be hit, and consumers are likely to pull back even more on consumption spending. The Federal Government would want to try to avoid this negative feedback loop.
Will the consumer spend
With respect to the consumer, there were several meaningful measures to support Australian households to ease the cost-of-living pressures. Firstly, there is relief for consumers through the $300 energy bill rebate which will apply to all households.
The total energy bill relief from 1 July will cost $3bn. Also providing support to households will be the Stage 3 tax cuts which commence on 1 July 2024. According to government numbers, all 13.6 million Australian taxpayers will on an average receive a tax cut of $1,888 in FY25. This should be supportive of consumption spending. However, we believe value brands will continue to hold up better in the current environment, as we have previously written.
Building Australia’s competitive advantage on the global stage
The government introduced a $23bn ‘Future Made in Australia’ program which includes grants and incentives for sectors and companies to assist with renewables / energy transition (achieve net zero emissions) and encourage high-end manufacturing.
Whilst the program is encouraging, most of the measures are over a longer timeframe and the motivation to invest over the near-term is not pressing, in our view. Specifically measures include – $7bn over 11 years for Critical Minerals Production Tax Incentive; $6.7bn over 10 years for Hydrogen Production Tax Incentive; $1.7bn over 10 years for solar and battery manufacturing & supply chain resilience.
Open season on international students
Immigration was a key talking point, with international students catching the brunt of it in our view. The government announced limiting the number of international student enrolments at universities subject to how much student accommodation is provided.
Firstly, it appears to be “open season” on international students across the world with Britain, Canada, France, and Netherlands all trying to change policies on this front. However, in doing so they are risking a material hit to the economy to the tune of billions of dollar every year – “In Britain, where they typically pay two to three times as much as locals in tuition fees, one study last year estimated the total economic benefit of the 2021-22 cohort at £41.9 billion ($53 billion) against costs of £4.4 billion, for a benefit-to-cost ratio of 9.4 to 1” (source Bloomberg).
To provide you some context of the size of the sector in Australia, in 2018 international student enrolments contributed $34.2bn in total export value. We believe the euphoria around international students will subside and the strongest players will emerge on the other side with improved market positions.
Figure 2: Export value generated by international students 2018
Source: education.gov.au, Banyantree
Housing
The government also announced measures to support housing construction and affordability. However, we see little immediate impact (watch for improvement in the approvals data).
Nonetheless, the government will provide measures such as – $1bn through a new Housing Support Program for investment in infrastructure to support new housing; $1.9bn in concessional finance to community housing for affordable & social housing.
Find out more about BanyanTree Investment Group, their research, and portfolios by clicking here.
Investment Manager / Director at BanyanTree Investment Group
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