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As I See It: May Budget 2023

Good morning to you all

This newsletter will focus primarily on the budget that was handed down last week and  also looking at the economic implications of current policy settings.

Budget Surplus

The first thing to say is that the budget was in surplus for the first time in 17 years. This was quite a turnaround from expectations at the mini budget last year and reflected improvements in the price of our resource sector and a higher tax take with more people being in work (both corporate and personal tax).

The table below from treasury shows the attributions that reflected these numbers. Clearly this is good news and compares favourably with most of our trading partners who are still running very substantial deficits. Looking to the future, should resource prices remain similar to current experience we will stay in surplus for future years. The current future budgets really do understate the likely revenue from resources and also the likely additional income from the large migrant intake expected over the next two to three years. Iron Ore prices are currently at US$105 per tonne while the budget conservatively estimates based on US$55 per tonne.

Reconciliation of 2023-2024 General Govt revenue estimates ($m)(Source: Australian Treasury, Budget Papers)

Of this windfall about 80% of the proceeds were used to reduce debt while the other 20% were invested back into increased Social Security and ancillary benefits. Whether this becomes inflationary will largely be determined by potential wage increases in the public sector and whether this becomes an embedded cycle each year.

JobSeeker Payment Rates(Source: Challenger)

At this stage treasury has budgeted on inflation falling from 6.5% this year to 3.5% in 12 months’ time which if achieved would materially impact the need to have higher interest rates.  The bond market is predicting significant reductions in our rates over the next 12 months. For reference you may well recall that we had interest rates at normally 10 basis points for three years while inflation was around 3% so it is perfectly possible if there is productivity improvements in the workforce and continuing use of technology to drive down the cost of products and services that interest rates could fall substantially over the next two to three years.

If this is the most likely projection for the future, then growth assets such as shares, and properties should do well with cash rights obviously becoming less attractive.

Importantly the promised personal tax reductions for next year were confirmed which again will provide further disposable income to invest back into our economy. On the downside superannuation balances above 3 million do look subject to additional tax.  This is subject to the Labor Party winning the next election, so we do have plenty of time to think this through and use franking credits to mitigate much of the potential additional tax.

Income Tax Cuts(Source: Challenger)

Australian Property

Residential property in Australia has already shown signs of improvement over the last three months, reflecting expectation that interest rates have peaked. For multiple reasons buying real estate in Australia particularly close to our CBD’s is a sound investment. Both federal and state governments continue to provide certain incentives particularly for essential workers to get into the property market and this remains a key goal for most of our younger clients to achieve as a priority.  Improving their long-term security and providing a secure investment that is currently exempt from capital gains tax on sale.

Quarterly Rolling Change in Dwelling Values(Source: Corelogic)

US Debt Ceiling

One of the current overseas concerns is the US debt ceiling that will need to be resolved by mid-June 2023. This seems to happen with monotonous regularity as day to day society continues to live beyond its means a need and to provide additional authority for greater borrowings to fund their government. Historically this has led to aggressive jaw boning between the Republicans and the Democrats leading to confusion right up to the last moment. This has generally been bad for markets but perhaps already priced into current share prices. The actual interim results from the US have been quite strong particularly from the technology sector but the actual improvement in share price has been limited to 27 large technology stock which dominate the market.

Top 25 Tech Companies Q1 2023 (Source: GlobalData)


Another area of uncertainty is the resolution of Russia’s illegal annexation of parts of  Ukraine. At the time of writing the Ukraine offensive seems about to commence with the support of NATO. A swift positive resolution would be good for markets however any uncertainty in the speed and likelihood of a positive outcome would lead to greater volatility. Already we are seeing much of the supply based problems of transport and energy reverting back to normal rates which again is reducing inflation rapidly. Going into the European summer energy prices should fall further which again should assist central governments in dropping interest rates quickly.

VIVID Function Thursday 8th June

We are pleased to advise that we have booked a private room in the Rocks for a client function in the middle of Vivid. The intention being for clients to enjoy the festival and then to drop into the function for drinks and food at their leisure. We have much to be grateful for and this will be an opportunity to celebrate together. Invitations to follow in the next few days.

We have a busy few weeks ahead of us as we come to wards financial year end and as normal keep our offices open on both Thursday nights and Saturday mornings for your convenience.

Best wishes   

Tony and Fiona

Posted by Dr Tony Virtue, Principal


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