2020 Federal Budget worth the wait for investors in Australian equities

Josh Frydenberg’s delayed Federal Budget contained a bundle of good news for domestic-focussed businesses in Australia and for investors in those companies. Containing almost $100 billion in new spending, it signals a sharp change in direction from the Government’s pre-COVID focus on fiscal discipline.

Having well and truly turned on the tap and expanded spending by almost a third, the Government is now trying to pass the baton to business, allowing it to lead the recovery. Central to this task is freeing up corporate cash flows, with the intention of supporting profits and encouraging hiring, and there are already signs that the real economy is picking up on the back of government action.

Tax cuts

On face value the Government’s sweeping tax cuts appear highly targeted to individuals, but there’s a lot in there for business as well. The $27 billion asset write-off scheme will act as an immediate tax shield for all but a handful of Australia’s largest companies, and businesses are likely to respond by bringing forward spending on capital assets.

There aren’t any direct cuts to corporate tax, but most businesses will be able to offset losses incurred up to July 2022 on taxes paid from the 2018-19 financial year onwards.

In combination, these two initiatives should have the combined effect of easing revenue constrictions for businesses, allowing them to invest for the future and supporting workforce retention and hiring.

At an individual level, the flattening and simplification of the tax structure, and retrospective application of the changes, will mean a tax cut for a large section of the workforce that will show up in pay slips before the end of the year. The point of the exercise is getting stimulus cash into the hands of people who can spend it as soon as possible, creating flow on effects to local businesses.

Infrastructure and construction

The Government announced $10 billion in new infrastructure spending over the next 10 years, which comes in addition to the $100 billion already in the pipeline. These large, nation-building initiatives can take two years or even longer to come to tender, so the opportunity remains to increase spending in this area as more projects become shovel ready.

The construction sector has been further bolstered by HomeBuilder and other initiatives to stimulate the housing industry as it deals with a roll-off in building approvals, particularly in apartments. Shifting demand away from inner-city property to house and land packages on the urban fringes and in neighbouring towns has also helped compensate for the downturn, as will the continuation of first-home buyer schemes and potential for further action from state governments, such as reform to stamp duty.

Resources

A centrepiece of the Federal Government’s recovery plan is the opening up of five new gas basins to ease supply constraints on the east coast and support the creation of new manufacturing jobs. The aim is to resolve the situation that Australia has faced in recent years where the west coast has enjoyed the benefits of some of the lowest gas prices in the OECD, whilst the eastern states have suffered under some of the highest. Unfortunately, at the current time the Commonwealth is pushing its barrow uphill into low global LNG prices, raising the cost of inducing private capital into the field.

More broadly, we believe the outlook for the resources sector appears more positive than the Government has factored into the budget, which sits in contrast to a few other more optimistic assumptions made, particularly in relation to the pandemic. Strong prices are incentivising new mining investment, and many small and medium-sized operations will benefit substantially from asset write offs.

Additional measures

A number of other initiatives announced in the budget count as positive news for Australian businesses, including increases to aged care funding (although the bulk of reform in this space probably won’t eventuate until the Royal Commission into Aged Care and the Retirement Income Review have concluded) and the new ‘Chapter 11-style’ bankruptcy provisions being introduced for small businesses to encourage continuity and reduce rates of default.

And of course, the continuation of the JobKeeper and JobSeeker programs into 2021, whilst not a surprise, will be critical to smoothing out what should hopefully be the tail of the recession.

The combined effect of these stimulus measures at a time of record low interest rates will be highly supportive of equity pricing over the short to medium term, and positive conditions should persist for some time into the future. In our view, the interest rate environment will remain low so long as the economy struggles to generate inflation, and the Government has indicated that deficits will continue while the unemployment rate is less than 6%. Thanks to Australia’s relatively strong fiscal position heading in to the crisis, the country can afford to avoid the trap of early austerity, and the stimulus outlined in this budget should have plenty of room to run its course.