posted in: Building Wealth
2021 Budget analysis
Despite better than expected economic results since the last budget, this year’s Federal budget is another big spending budget. The Government has committed $74.6 billion to a range of initiatives designed to create more than 250,000 jobs over the next two years.
Some commentators are suggesting the budget is a pre-election budget, with the Government spending in areas where they are usually politically vulnerable including on aged care, health, childcare and women.
The budget makes a number of assumptions such as that all Australians will be vaccinated by the end of the year, that international borders will reopen by mid next year and that we won’t have any significant COVID-19 outbreaks before then.
With such significant spending, Australia remains in deficit and will do so for several years.
Last year the government feared unemployment could reach 15% with 2 million Australians unemployed and the economy detracting by 20%. That hasn’t eventuated. Unemployment is expected to fall below 5% by next year and economic growth is expected to hit 4% next year.
Consumer sentiment is the highest it has been in 11 years and half a million jobs have been created since the last budget.
Despite this strong economic outlook, Treasury isn’t expecting wage growth above 2.75% until 2025. Without an influx of skilled overseas migration coming to Australia, it will be interesting to see if this rings true as many industries have already seen a significant tightening of the employment markets, with the increased competition for workers typically leading to wage inflation.
Government’s debt position
There will be a $161 billion deficit this year. This is $52 billion lower than expected in last year’s budget. The deficit is expected to fall to $57 billion in 2024/25.
There will be almost $1.2 trillion in gross debt by 2025 despite the economic recovery. Net debt will represent more than 40% of the economy in 2025, compared to 18.2% during the 1990s recession and 3.7% during the GFC.
The population is expected to rise slightly to 25.8 million in 2022 as citizens return home, with a big intake of migrants once the borders reopen. Net overseas migration is forecast to reach 95,900 in the 2023 financial year and return to previous levels within four years.
Low and medium income earners will receive tax cuts to the tune of $1,080 for singles and $2,160 for couples through an extension to the low and middle-income tax offset (LAMITO). This will set the budget back $7.8 billion.
To encourage business investment, businesses with a turnover of up to $5 billion will be able to write off the full cost of any depreciable asset they buy before June 30, 2023. This extends the instant asset write off measure announced in last year’s budget by another year.
$2.1 billion in targeted support has been committed to industries hit particularly hard by COVID-19 including aviation, tourism, the arts and education.
The government has committed $17.9 billion over five years to continue to allow small businesses to “carry back” old losses.
$2.7 billion has been committed to the JobTrainer fund for 170,000 new apprentices and traineeships.
JobSeeker and other allowances
The base rate of JobSeeker, Youth Allowance, Parenting Payment, Austudy, ABSTUDY Living Allowance, Partner Allowance, Widow Allowance, Special Benefit and Farm Household Allowance will increase by $50 a fortnight. The increase is expected to benefit 1.9 million Australians and will cost the Government $9.5 billion.
For JobSeeker, there will be an increase in mutual obligations with recipients required to search for 20 jobs per month from July 2021.
$15.2 billion has been committed to infrastructure projects around the country.
$1.7 billion has been committed to improve affordability of childcare for low and middle income earners. The childcare subsidy will be increased by 30 percentage points up to a maximum of 95% for second and subsequent children aged five years and under. This is expected to benefit up to 250,000 families.
So, for example, for a family earning $110,000 a year, the subsidy for their second child will increase from 72% to 95%, making them better off to the tune of $95 a week for four days of care. For a family with three children on $80,000, the subsidy would increase from 82% to 95% for their second and third child and they would be better off by $108 per week for four days of care. The changes won’t apply to families with only one child.
The annual subsidy cap of $10,560 for families earning $189,390 or more will also be removed.
The changes will come into effect in July 2022.
10,000 places have been created for first home buyers to build a new home with a 5% deposit and 10,000 places for single parents to buy a home with a 2% deposit.
The Government has extended the Super Saver scheme which enables first home buyers to voluntarily add to their super, attracting a lower tax rate, in order to save a deposit for a home faster. From July 1 2022, the amount that can be contributed to super will increase from $30,000 to $50,000.
$1.9 billion has been committed for the COVID-19 vaccine rollout. $1.5 billion has been committed to COVID-19 testing, contact tracing, respiratory clinics and telehealth.
$13.2 billion has been committed to the NDIS.
$2.3 billion has been committed to mental health and suicide prevention.
$17.7 billion has been committed to improving the aged care system including 80,000 new home care packages and 34,000 training packages.
Education & training
$2 billion has been committed for preschools and $19 billion for universities. 5,000 places have been created in higher education courses.
$1.1 billion has been committed to addressing domestic violence including for emergency accommodation, financial support and legal support.
$1.5 billion has been committed to expand manufacturing including in clean energy and medical products development.
Research & Development
The new Patent box initiative will lower the tax on income earned from new patents to 17%. This will apply to medical and biotech companies, and may be extended to clean energy, in an effort to retain IP in Australia and quicken commercialisation.
The $450 monthly minimum income threshold for super contributions has been removed, to the benefit of 200,000 low income earners, mainly women. Older Australians will no longer need to meet a work test for voluntary contributions to their super.
Downsizer contributions to superannuation
Over 60 year olds will be able to downsize and contribute $300K to super from the sale of their home ($600k per couple), which was previously only available to over 65 year olds.
If you have any questions surrounding the 2021 budget or would like to discuss how the budget may affect you, please get in touch with our team by clicking here.