With nearly 12 months in office, Labor handed down its Budget amidst a commodity price boom and multi-decade high inflation. The 2023-24 Budget largely follows those that have gone before, taking a small step toward balance sheet repair but generally favouring fiscal expansion. Tonight’s key announcements reaffirm the commitment to support the vulnerable through cost-of-living relief while childcare measures aim to boost workforce participation.

Due to a fortunate situation of strong employment growth and commodity prices, a vastly better fiscal position provides a margin of safety for the government to increase expenditure. $14.6B has been committed to cost-of-living relief measures, including energy rebates, Medicare rebates and a boost to Jobseeker forming the centrepiece of the government’s plan to insulate the economy against a backdrop of declining growth and elevated inflation.

Measures will be targeted towards low-income households to avoid worsening inflation. However, there is no meaningful attempt to tackle structural pressures from NDIS, aged care and healthcare which has seen growth outpace inflation over the past few years.

With this government needing to stamp their economic credibility, we think this Budget represents a step in the right direction. And given the RBA has its sights set on reducing demand, fiscal policy will need to provide immediate support if the economy stutters. In summary, the measures announced today broadly support equity market sentiment.

Cost of living relief over fiscal repair

At the headline level, a small surplus of A$4.2b is expected in 2023-24 (+0.2% of GDP) improves upon the A$36.9b (4.5% of GDP) deficit predicted at the October Budget. That said, deficits are expected over forward estimates as commodity prices are forecast to ease. Three core principles guide this year’s Budget. Firstly, to offset cost-of-living pressure for the vulnerable.

Second, spending restraint in key categories health and social security. And third to reprioritise long-term spending in infrastructure and defence. Rising debt is an outcome of this year’s budget, the capacity for the economy to absorb higher interest repayments will be tested over the next few years if employment conditions or commodity prices end up less favourable.

Treasury’s forecast for gross debt rises from A$923b in 2023-24 (35.8% of GDP) to A$1,067b in 2026-27 (36.5% of GDP). However, Australia’s fiscal position remains in much better shape than global peers. This leaves some dry powder should current economic conditions deteriorate.

World Gross Debt-to-GDP (Consensus Forecasts and Treasury Estimates)

Source: IMF World Economic Outlook, Australia: Federal Budget Papers 2023-24

Incrementally positive for equity markets

taking everything into account, some fiscal restraint, targeted spending, and measures to address workforce participation should provide investors confidence that the government is taking a safe approach to managing the budget.

Importantly for the market, a small surplus and few inflation-inducing spending measures should also reassure investors that a slowdown is possible without making abrupt changes to fiscal policy. We see support for the AUD as the fiscal position remains stronger than peers despite the incremental step-up in fiscal spend.

Few consumption levers pulled this year

A feature of previous Labor Budget’s such as one-off cash payments, big increases to welfare and tax offsets were notably absent. Instead big spending programs were replaced by targeted relief to jobseekers and low-medium income households.

So this will not provide the sugar hit to retailers we’ve seen over the past few years coming out of COVID. But equally, targeted support to the vulnerable should also limit the downside risks to consumption.

Budget assumptions – setting a low bar for next year

Key commodities are assumed to decline from elevated levels over four quarters to the end of the March quarter of 2024: the iron ore spot price is assumed to decline from a March quarter 2023 average of US$117 to US$60/tonne; the metallurgical coal spot price declines from US$342 to US$140/tonne; the thermal coal spot price declines from US$260 to US$70/tonne; and the LNG spot price declines from US$16 to US$10/mmBtu.

AUD is expected to remain at 67c through the forecast period. Net migration is expected to be 400,000 in 2022-23, 315,000 in 2023-24 before reverting to trend 260,000 in 2024-25.

Our thoughts

The Budget announcements reinforce our view that fiscal support will not be withdrawn hastily. However, the government still lacks the determination to bring about significant structural reform, chiefly around productivity, environment and innovation. The lack of genuine long-term reform has been an unfortunate feature of recent budgets.

In our view, the budget is unlikely to bring about significant revisions to corporate earnings, however the ongoing commitment to support the vulnerable parts of the economy while also demonstrating some fiscal restraint will underpin market sentiment and support earnings confidence. Resources, Energy and Financials have benefitted from resilient economic activity and the inflation dynamics.

Household balance sheets remain in good shape which should continue to support consumption. We also see upside risk to dividends if economic conditions hold. We prefer a targeted portfolio approach favouring quality (strong cashflow and market position), sectors linked to higher inflation (Energy, Resources) and select cyclicals (CTD, QAN, WEB, TWE, VNT).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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The 2023-24 Budget largely follows those that have gone before, taking a small step toward balance sheet repair but generally favouring fiscal expansion.
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