What Investors Should Know About the Federal Budget

According to government figures released ahead of Tuesday's federal budget, inflation is projected to return to the Reserve Bank's target range a year sooner than the bank's forecast. Australia's Treasury anticipates that inflation will drop to the central bank's target range of 2% to 3% before the end of 2024, which is sooner than both the government and the Reserve Bank of Australia (RBA) had previously estimated.

This projection is part of the upcoming budget statement released on Sunday. The Treasury maintains its inflation forecast for the 2024/25 fiscal year at 2.75% but expects a quicker decline in the financial year ending in June 2024, adjusting its estimate to 3.5%, down from the 3.75% projected in December. This forecast is more optimistic than the RBA's recent prediction, which does not anticipate inflation dropping below 3% until late 2025. The RBA's forecast also does not account for any new measures that Treasurer Jim Chalmers may announce in the budget on Tuesday.

Treasurer Jim Chalmers stated that the upcoming budget aims to reduce inflation and alleviate financial pressure for citizens.

His remarks have led to speculation about potential increases in family payments, which currently benefit 1.3 million families and 2.5 million children. Despite targeting a modest surplus, Chalmers plans to save most revenue gains from the robust labor market and high commodity prices. Chalmers emphasised his forecasts would be rosier than those the Reserve Bank has produced because they were based on more up-to-date information.

The upcoming budget will highlight a significant cost-of-living package, including modifications to the Coalition's stage-three tax cuts set to begin in July, which are projected to cost $359 billion over a decade. Adjustments made by the Labor Party to the tax plan will result in average income earners receiving more benefits than initially intended, with the government stating that 84 percent of workers will see financial improvement. Official forecasts estimate that the average tax cut will be around $1,888 for the fiscal year 2024-25.

The upcoming budget will include a proposal to eliminate approximately $3 billion in HECS-HELP loan debt, providing financial relief to students and graduates. This plan involves changing the indexation of payments from being based on the Consumer Price Index (CPI) to the lower of either inflation or the Wage Price Index (WPI), with this change being retroactively applied from June 2023. As a result, much of the recent surge in outstanding student loan debt accumulated over the past year will be effectively erased.

Public hospitals are poised to receive increased funding as the federal government is in the process of finalizing a new five-year agreement with the states, set to commence in mid-2025. The commonwealth has proposed to boost funding by an additional $4 billion in the 2025-26 fiscal year and $13 billion over the entire five-year period.

Additionally, the government plans to enhance funding for the medical research future fund over 13 years, allocating $1.1 billion for ongoing projects, $150 million for research into cancers with low survival rates, and $150 million to address health inequalities. An extra $500 million will be directed to other research initiatives.

The budget includes $15.4 billion in "unavoidable spending" to maintain programs initiated by the previous government, covering areas such as palliative care, cancer support, chronic public health conditions, and treatments for alcohol and other drug issues.

The budget will reveal plans to elevate Australia's defense spending from 2.1% of the country's GDP in the upcoming financial year to 2.4% by 2033-34. This increase is partly due to major investments such as the Aukus agreement for nuclear-powered submarines.

Despite this growth, some defense programs will face reductions. Last month, the government announced it would liberate approximately $73 billion over 10 years by slashing, postponing, or restructuring certain defense projects.

In terms of foreign affairs, the government is committed to contributing $492 million to the Asian Development Fund for the 2025-28 cycle, aiming to address regional needs and implement transformative development projects throughout the Indo-Pacific.

The budget will allocate over $17 billion to infrastructure endeavors, with $147.5 million set aside for planning new roads and railways in the greater Western Sydney area. Funding will be provided for projects like the Mamre Road Stage 2 and Elizabeth Drive sections upgrades in New South Wales. Additionally, $20 million will be granted to the NSW government to prepare a business case for expanding Sydney's railway network into the Macarthur region.

The budget will include over $7 billion dedicated to the government's Made in Australia Act, which encompasses a range of industrial subsidies designed to enhance local manufacturing. This funding includes $1 billion for the production of solar panels within Australia, $2 billion to promote green hydrogen projects, and $1 billion to aid in the development of a quantum computer in the country.