What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.

Billionaire’s ‘epic bubble’ call may be wrong

Billionaire’s ‘epic bubble’ call may be wrong

Jeremy Grantham is the legendary former Chief Strategist of fund manager GMO. In his 82 years there’s very little he hasn’t seen in financial markets, and he rightly earned his legend status by calling the last three great stock market bubbles: the Japanese equities bubble of the late 1980s,  the US dotcom bubble at the end of the 1990s and the 2008 GFC.

So it’s understandable people took notice when he greeted the new year with a frightening declaration:

The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

Consider the counter factual

It sounds absurdly presumptuous to take the other side against such a storied investor, but I believe Grantham’s arguments warrant some context, and smart investors should always consider the counter factual.

First, Grantham has warned of an imminent US stock market collapse literally every year since the GFC and always for the same reasons: over extended valuations and the market’s reliance on central bank support. Grantham made a career out of identifying stock market bubbles, but even he conceded in an interview with Barron’s in 2015 that “for bubble historians…it is tempting to see them too often.”

Second, Grantham points to the S&P 500’s PE being in the top few per cent of its historical range while the economy is in the worst few.

With respect to the PE ratio, there have been spectacular changes in the macro, or big picture, settings for stock markets that have dramatically affected valuations. For example, inflation and interest rates have undergone the greatest ever reversal over the past 40 years. After interest rates peaked at close to 20 per cent under Fed President Volcker in the early 1980s, they have drifted lower and lower ever since, to the point where now we are becoming accustomed to negative government bond yields. Likewise, inflation is persistently below central bank targets.

I’ve argued before that it makes perfect sense those low yields have a profound influence on how shares are valued, especially for companies that offer higher levels of growth than the broader market. Whether it be through basing a discounted cash flow valuation on lower risk-free rates (bond yields) or the return premium offered by stocks over bonds, lower yields drive higher share prices.

Inflation’s effect on valuation

Given we’ve never seen a mix of yields and inflation like we’re seeing now, using historical references as your only valuation anchor makes no sense. A more convincing concern is the potential return of inflation because that will fundamentally change the valuation landscape, but there is no one who can give you a definitive answer as to what drives inflation. You need only look at the Fed’s ‘dot plot’, which started back in 2012 and records where each of its 12 board members and seven presidents think inflation and interest rates are headed. Despite having the best information available, and apparently being the best qualified in the US, they’ve never been close to right.

Another thing that has driven valuations on the US market up is that so-called ‘growth’ stocks, which are those companies whose earnings are growing faster than the index and therefore usually trade on higher PE ratios, have increased from 15 per cent of the overall index in the 1970s to now 77 per cent. By contrast, ‘value’ stocks, which rely more on general levels of economic growth and trade on lower PEs, account for commensurately less of the index.

In terms of the economy being terrible, recent economic data suggests otherwise. Like Australia, the US government injected about 13 per cent of GDP in brand new money in the form of COVID support, money that has to go somewhere. Sure, GDP fell 31 per cent in the March quarter of 2020, but it rocketed up 33 per cent in the June quarter. Business confidence is close to its equal highest in the last 25 years, unemployment is not far off its average for the post GFC/pre-COVID period, house prices are at an all-time high and there has been a record number of US companies upgrading earnings guidance in the first quarter. And the new Biden administration is preparing to spend another $1.9 trillion.

Lessons to be learned

By his own admission, Grantham’s past calls have typically been early. Getting out of Japanese and US stocks two years before the market peak cost his firm’s investors about 60 per cent each time. That offers a couple of salutary lessons. First, timing market tops is really challenging, especially if you rely on valuations to do it. And second, even if you’re worried about a market looking toppy, you don’t have to sell out of it entirely. You can simply reduce your holding gradually as it rises and switch your money into an asset class or market that doesn’t look as stretched, such as Australian, European or emerging markets shares.

There are undoubtedly pockets of the US market that look extreme right now, especially the speculative end of retail investors, but even that doesn’t apply to the whole market. When billionaires make bearish calls it’s hard to overcome our innate human bias that prioritises self-preservation and sees pessimists as smarter, but for your portfolio’s sake, it can pay to look for context.

The 2020 recession, why this time is different.

The 2020 recession, why this time is different.

There are number of things that make the global economic recession of 2020 different to any other we’ve seen, and while you’d never wish to go through an experience like it, there are definitely some silver linings.

The government forced the economy into recession

This was the first time in living memory that governments deliberately threw economies into recession. If you close down all but a few sectors and tell workers to stay home, obviously economic activity is going to crash.

Previous recessions have been attributable to the business cycle: typically there is a speculative build up which causes an imbalance that eventually tips over, and the worst recessions are those fueled by debt.

The standout example of this is, of course, the GFC. Building activity reached frenziewd levels in the US because buyers were able to access debt way too easily. The adjustment process was long and painful because credit, which is the lifeblood of a modern economy, all but seized up.

This time there were no baddies

When a recession is caused by excess building in some part of the economy, there is normally going to be a culprit you can point to. It might be banks, or it might be investors, but there’s a group that cops the blame and derision for crashing the economy.

That’s when the philosophy of ‘moral hazard’ argues if the culprits just get bailed out there’s no lessons learned to stop the same thing from happening again. Politicians and the media will often argue the responsible group should somehow be punished, perhaps with tighter regulations or even criminal charges.

This time (ignoring arguments about how COVID started and who or what is responsible), there is no real culprit to punish.

No holds barred support program

Because the government was responsible for switching off the economy and there was no concern about moral hazard, both they and central banks were able to throw the proverbial kitchen sink at supporting the economy.

Central bankers learned valuable lessons from the GFC that they had to make sure credit could continue to flow. The range of measures undertaken was unlike anything we’d seen before, and while things were ugly for a short time, markets were once again reminded how powerful central banks can be.

Remarkably, US financial markets have clearly recovered strongly despite the Federal Reserve barely tapping a range of the programs they announced – see chart 1 below.

 

Chart 1: US financial markets have recovered despite many of the Fed’s announced measures barely being utilized
Chart 1

The Bazooka

By far the most important support measures were from governments. One after another, governments wre throwing massive amounts of newly created money into their economies. Programs like JobKeeper in Australia and its equivalents overseas were critical in supporting families that otherwise would have been in dire financial circumstances.

The critical part is that it was newly created money, which governments can do directly, but central banks can’t. The central bank programs can help create new money by encouraging people to borrow (loans also create money) but that was going to be tough when the media was full of stories about the global economy crashing.

This is the opposite to what happened after the GFC, where, especially in Europe, governments preached from the gospel of austerity. Spending cutbacks sucked money out of economies and saw them slow to a grinding crawl.

Economies are on fire

Some of the data showing how sharply economies are bouncing back is remarkable. Here in Australia, we’re seeing restaurant bookings up to 50-80% compared with the same time last year, new car sales leaped 12% from last year and Commonwealth Bank credit card sales were up 11%. They are huge numbers and it’s not just because lockdown restrictions were eased.

The Australian government’s COVID support programs amounted to 13% of GDP. It’s hard to overstate how massive that is. In the wake of the GFC, the Chinese government ‘rescued’ much of the developed world by announcing a spending package equivalent to 12% GDP (clearly the absolute amounts are hugely different, it’s the proportion that’s significant). The early withdrawal of superannuation adds anotehr 2% to that. The household savings ratio hit almost 20% in the June quarter, only a fraction less than the highest it’s been in the past 60 years.

That’s an awful lot of pent-up spending power.

The silver lining

Ever since the end of the GFC, central banks have pleaded with governments to raise fiscal spending to help increase economic growth. But most governments, including Australia’s, were obsessive about balancing budgets and instead were more intent on reducing spending (the obvious exception to that was $1.2 trillion Trump tax cuts, which helps explain why the US economy was doing so much better than most others).

It’s taken the unique circumstances of the pandemic to show the power of fiscal spending to drive economic activity: low income families suddenly had enough money to go to the dentist and get the car fixed, and the money they spent doing that got spent again and again.

If governments take the lessons on board, it’s possible it could be the first step toward abandoning the flawed dictums of neoliberalism and addressing the massive wealth inequalities that lie at the heart of so many other problems we face. That would be a great silver lining.

Want to take advantage of the expected economic growth?

Call Steward Wealth today on (03) 9975 7070 to learn how.