Australia | May 13 2021
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The Budget continues the transition from crisis support to growth recovery and imbeds active policy support into key areas, impacting on certain sectors and stocks
-Far more than expected additional fiscal stimulus of $96bn over 5 years
-Brokers believe conservative assumptions leave door open for further upgrades at mid-year
-Budget 2021 assumes a further delay to re-opening of the international border until mid-22
-Some policy initiatives – that add to the demand for housing – deemed inappropriate for the economic cycle
By Mark Story
In an attempt to rebuild the economy, the big-spending budget unveiled by Treasurer Josh Frydenberg on Tuesday included a mixed bag of major new spending and tax breaks over five years, with additional funding going into social services ranging from aged care, mental health, and women’s safety measures, plus business investment.
The materially stronger than expected economic recovery to date improved the budget position (deficit) by a cumulative $104bn over five years. However, brokers note this was almost completely offset by policy decisions which provided far more than expected additional fiscal stimulus of $96bn over five years; including a significant $18bn or 0.9% of GDP in 2021-22 alone.
The government's nominal GDP growth forecast was revised up sharply to 3.75% year-on-year in 2020-21 but is expected to grow only 3.5% in 2021-2022 as Treasury forecasts assume the iron ore price retraces to their 'long-run' estimate of US$55/tby March 2022, from the current US$230/t.
However, most brokers believe these relatively conservative assumptions leave the door open for further upgrades in the Mid-Year Economic and Fiscal Outlook (MYEFO), and/or a Pre-Election Economics and Fiscal Update. With each $10/t of iron ore price upside adding $1.3bn in revenue, UBS estimates if prices remain near the record spot price of US$230/t ahead, it implies revenue upside of over $20bn a year.
Overall, the Budget remains focused on supporting the post-covid recovery, and driving unemployment lower to support a pick-up in wages growth, but also smacks of preparing for an upcoming federal election, which has to be held by 21 May, 2022 at the latest, but speculation is of an earlier date to cash in on the Budget's largesse.
Budget 2021 assumes a further delay to re-opening of the international border until mid-22. But UBS believes the virtuous cycle of a much larger than expected fiscal stimulus results in the economy and labour market booming, underpinning a materially better than expected budget 'starting point'.
Overall, UBS expects the Budget to further underpin consumer and business confidence – already around record highs – and poses upside risk to the broker’s above consensus GDP outlook of 5.0% growth year-on-year in 2021 and 3.3% in 2022.
While Budget 2021 provides some targeted additional fiscal support, Citi believes some policy initiatives – that add to the demand for housing at a time of rapidly rising prices — may not be correct for the economic cycle.
Rather than temporarily extend some existing programs, the broker believes the Budget could have prosecuted an argument for more structural supply-side reforms to sustainably lift productivity and real wages growth.
Where’s Budget money going?
Key policy initiatives highlighted in Budget 2021 included $20.7bn to extend temporary full expensing and loss carry-back, which is positive for business investment, $17.7bn towards aged care, and $15.2bn in additional infrastructure spending over ten years.
Three other large provisions earmarked with Budget 2021 included $7.8bn to extend the Low and Middle Income Tax Offset or another year, $2.7bn towards expanding the apprentice wage subsidy program, and $1.7bn in additional funding for child care.
Citi suspects increased spending in aged and child care signals the government is looking to further boost female participation in the workforce in these female-dominated industries. This is also supported by other measures to top up women’s superannuation by removing the $450 per month income threshold of which employers don’t have to pay super.
Tourism and Aviation will also receive a $1.2 billion package, with half price flights for nearly 800,000 airline tickets adding to the $2.7bn in direct aviation support already provided through covid. Around $274.6 million is going towards the expansion and extension of successful programs to support Australian businesses such as travel agents, zoos and aquariums, and events providers that rely on international tourists.
For equities, Jarden sees the budget as broadly supportive of the current macro backdrop, and positive for aged care, banks, building materials, car dealers and retail.
Based on Macquarie’s assessment, the newly announced measures are worth around 2% to disposable income from FY23, which the broker views as a positive for the discretionary retailers, and likely supporting household spending into the medium term.
Macquarie maintains Outperform ratings on Wesfarmers ((WES)) and Harvey Norman ((HVN)), which the broker expects to continue to benefit from the strong housing cycle in 2021, driving furniture and hardware spending.
Aged care reform
The additional $17.7bn earmarked for aged care over five years includes some immediate funding for operators in FY22. Residential aged care providers will benefit from a Basic Daily Fee supplement of $10 per bed per day.
Jarden expects incremental funding for Estia Health ((EHE)) of $21.5m, Japara Healthcare ((JHC)) of $14.6m and Regis Healthcare ((REG)) of $23.6m. If assumed to be 100% margin, this would result in earnings uplift on Jarden's FY22 forecasts of 48%, 759%, and 54% for these three health care providers respectively.
Mandated care minutes will also be introduced in 2023 of 200 minutes per resident per day, including 40 minutes with a registered nurse. Importantly, Jarden notes with the costs included in Budget estimates (government funded), fears of increased costs appear overdone as they will not be absorbed by operators.
Finally, home care packages will see an additional 80,000 over two years costing $6.5bn.
While Budget 2021 provided more visibility and sustainability to aged care for funding, the sector wait for more detail in regards to a new aged care act and a transition to the AN-ACC (Australian National Aged Care Classification) funding model.
Childcare subsidies are expected to cost $1.7bn over the five years of the program, however, this program does not start until July 2022.
The policy will remove the income cap (currently household income of $189k) to be eligible for childcare subsidies, and the Treasury estimates this will aid around 250,000 families. The policy also aims to stop child care costs increasing dramatically for families with two or more children, with a subsidy boost of an extra 30% for each child after the first.
It is important to note subsidised child care allows parents, mostly women, to return to the workforce, thus increasing economic productivity.
The Budget outlines a further $4bn in healthcare (after the $17.7bn spent on aged care). Key initiatives include $2.3bn for mental health which includes a multitude of initiatives aimed at improving access and suicide prevention measures. As one of the largest operators of mental health facilities in Australia, Ramsay Health Care ((RHC)) is expected by Jarden to benefit as awareness and access is improved.
The model for mental health treatment is also changing with private hospitals investigating new models to cope with the sheer volumes of patients in need of care that cannot be addressed by dedicated beds in mental health facilities. Given that the budgetary funding should help fast track these efforts, hospitals also stand to benefit.
An additional $640m has also been earmarked for vaccine procurement and administration on top of what had already been announced in the MYEFO. This includes the government in advanced purchase agreements for a further 30m doses, while the government has also provisioned to purchase additional mRNA vaccine (technology) doses (used by Pfizer-BioNTech and Moderna vaccines).
An additional $557.1m has also been dedicated to extend temporary Medicare Benefits Schedule (MBS) pathology items for the testing and detection of covid. As a result, Jarden sees Sonic Healthcare ((SHL)) and Healius Ltd ((HLS)) as key beneficiaries of this over the next two years.
In addition, the broker notes the $204.6m earmarked for the extension of temporary telehealth MBS services should help listed company exposures like Sonic Healthcare ((SHL)) via its Sonic Clinical Services division. Similarly, an additional $184m in funding for the addition of genetic testing for IVF, and additional bowel screening tests which should help the pathology providers like Sonic and Healius.
While there are no material changes in Budget 2021 for private health insurance, the government has extended income thresholds for Medicare Surcharge Levy and private health insurance rebate for a further two years.
Budget 2021 has earmarked an extra $15.2bn for infrastructure investment, and is estimated to support over 30,000 jobs. Funds will go to previously announced projects including a new Melbourne rail terminal, the Great Western Highway in NSW, Bruce Highway upgrades in Queensland, North-South Corridor in SA and further stages of Metronet in WA.
While Citi expects infrastructure project work to ramp up over the next 12-18 months, the broker notes the headline $15.2bn is distributed across a ten-year period.
Given that the large existing pipeline of work implies a sizeable portion of the funding will be outside 2025, Citi suspects sequencing of projects remains likely. The broker notes there’s already a backlog of projects from disruptions during the lockdowns last year, especially in Victoria.
The government also announced $1.2bn to be spent over ten years for investment in low emissions technology, hydrogen hubs, development of carbon capture use, and agricultural feed technologies.
The government has extended the low and middle-income tax offset for an extra 12 months, and is expected to cost an extra $7.8bn for the duration of the program. It is targeted at 10m low and middle-income earners and will be worth up to $1,080 for individuals and $2,160 for couples.
Given that this program works through the tax return, the cashflow impact of the program does not benefit households until FY23, when the FY22 tax refunds are paid. The program is expected to boosts disposable income by around 2% for the year in which the cash is received.
The government has extended its instant asset write-off program by $600m in FY23, $10.9bn in FY24, and $6.4bn in FY25. This program allows businesses with a turnover under $5bn to instantly write off new assets. The government expects this measure to apply to around $320bn worth of investment, costing the budget $17.9bn over the forward estimates.
In addition, the temporary loss carry-back will also be extended by one year. The aim is to support cash flows for previously profitable businesses that made losses from the pandemic. The budget cost is $3.6bn over the forward estimates.
Macquarie views the extension of the Instant Asset Write Off as positive for capex suppliers, including tools, computers, autos and office furniture, which would include stocks Wesfarmers ((WES)), JB Hi-Fi ((JBH)), Harvey Norman ((HVN)), Eagers Automotive ((APE)) and ARB Corp ((ARB)).
Coupled with the Tax Loss Carry Back, the measures can bring forward other investment, benefiting stocks in infrastructure, Macquarie suggests, including APA Group ((APA)), AusNet Services ((AST)) and Spark Infrastructure, as well as Cleanaway Waste Management ((CWY)), Sealink ((SLK)) and BWX ((BWX)).
Then there’s $1.2bn in tax offsets for those spending over $500,000 on Australian gaming, plus concessional tax treatment (17%) for Australian developed and patented medical and biotech innovations.
Skills and training
While not tax related, additional incentives for business include a further $2.7bn wage subsidy for businesses and Group Training Organisation to take on new apprentices and trainees. The number of places will be uncapped and the government will provide 50% of the wage bill for 12 months for employers hiring new apprentices between 5 October 2020 and 31 March 2022.
The government expects that the program will support a further 70,000 apprentices above the original 100,000 when the program was initially announced.
What’s evident within Budget 2021 initiatives, adds Citi are attempting to target industries and jobs most in demand. For example, spending across health, especially age care features prominently in the number of vacant jobs. This is further evidenced by job vacancies measured by the ABS, which show higher than average job vacancies across most sectors, but especially health, construction and accommodation and food services.
The government will also provide grants for workers to take up agricultural jobs in the form of $2,000 for reallocation assistance for two weeks of work and up to $6,000 after four weeks.
First home buyers and downsizers
The government will also introduce a New Home Guarantee Scheme which will allow first home buyers to build a new home with a 5% deposit with the government guaranteeing the rest.
The government has introduced the First Home Guarantee scheme for single parents, which allows a single parent to purchase a dwelling with 2% deposit. The scheme is designed to support 10,000 single parents over four years.
The government will also expand its First Home Super Saver Scheme, by raising the cap that allows people to make voluntary contributions to superannuation and use that as their deposit. The cap will be raised from $30,000 to $50,000.
Ultimately, Citi believe these schemes will boost demand for housing further, leading to higher price gains than otherwise, and leading to a deterioration of affordability as income growth is unlikely to keep abreast with house price gains.
The reduction in the minimum age of the downsizer superannuation contribution from 65 to 60 will also allow those near retirement to make a post-tax contribution to their superannuation of $300,000. Applying from 1 July 2022, this is designed to encourage a greater housing supply by freeing up larger homes.
However, without structural reforms—such as removal of stamp duty—if house prices continue to rise rapidly, Citi suspects it will make the policy less effective because older workers would also face affordability issues buying other homes despite being able to make a contribution to super.
The Budget does not change Macquarie's equity strategy stance, seeing its as consistent with the broker's reflationary preference.
Specifically, Macquarie prefers cyclicals, given the expectation of stronger GDP growth, domestic exposures, given the view that strong commodity prices will support the Aussie dollar, value, as rising input costs signal rising inflation and create upside risks to bond yields, covid-losers, as reopening and mean reversion benefit stocks negatively impacted, and resources, as governments keep using more commodity-intensive
infrastructure and construction stimulus to boost employment.
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