2012-13 Budget Highlights: The good, the bad and the austerity

Only last week the Reserve Bank of Australia (RBA) decided to loosen monetary policy, cutting interest rates by half a percent typically a sign that the economy needs a boost. In tonights Federal Budget however, the Government has decided to apply significant fiscal tightening to return the budget to a surplus of $1.5bn over the coming twelve months. What do these conflicting signals mean for Australias economy and what are the implications for investors? Key tax and super changes

The income tax-free threshold will rise from $6,000 to $18,200. The next $18,800 earned is then taxed at 19% (increased from 15%) and the tax rate increases from 30-32.5% on income between $37,000 and $80,000.

Concessional contributions will be capped at $25,000 for everyone until at least 2014-15. The Government will post-pone its proposal to allow a cap of $50,000 for those aged over 50 with balances of less than $500,000 until 2014-15.

Economic overview According to Government forecasts, our economy is set to grow by more than 3% over the next three years with inflation largely within the RBAs target band of 23%. On the surface that makes Australia the envy of most of the Western world which remains indebted and in economic stagnation or decline. In returning the budget to surplus the Government is effectively withdrawing funds from the economy overall in order to retain a buffer in uncertain economic times. Australia is not currently completely in the clear however, with the retail and manufacturing industries in a fragile state and ongoing concern surrounding further global weakness. That makes it as important as ever for the Government to make the right allocation with this years budget. While there have been few new policy measures announced, it is worth highlighting the main changes to super, where funds will be withdrawn and areas where new money will be allocated.

The Superannuation Guarantee will gradually increase from 9% to 12% from 1 July 2013 through to 2020.

Drawdown relief of 25% for pensions will continue for 2012-13 and then return to normal in 2013-14. The Government intends to effectively reintroduce the superannuation surcharge in 2012-13 for those with taxable incomes over $300,000 through a 30% tax to be paid on concessional contributions instead of the standard 15% tax.

A new threshold to the net medical expense tax offset will see the amount of out of pocket medical expenses required for a singles earning over $84,000 and couples earning over $168,000 increased from $2,000 to $5,000. The offset rate will be reduced from 20% to 10%.

Where are the cut backs? Unfortunately theres no escaping a simple economic truth moving the budget from deficit to surplus is an overall drain on growth. Therefore, in order to make investments the Government must also be withdrawing some support from other parts of the economy. High income earners are likely to feel the greatest strain from this budget and there will be other costs. For example, superannuation funds will be imposed with a SuperStream levy in order to meet the costs associated with the Governments superannuation reforms. A fair go budget? According to Treasurer Swan, this years budget has been designed to support low and middle income earners and small businesses, ensuring families and businesses are sharing in the benefits of the resources boom. Some of the major areas where the Government plans to provide support include: Social, health and age care initiatives include investing in the first stage of a National Disability Insurance Scheme, improving dental services and new regional health infrastructure projects across Australia. The Government plans to invest $61 billion in 2012-13 in Australia's health care system, an estimated 37 per cent increase on 2007-08 levels.
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The Government also announced a $3.7 billion package to ensure a better, fairer, more sustainable and nationally consistent aged care system. Roads, rail and ports will receive investment of more than $36 billion over the six years to 2013-14. Families will receive tax benefits and new supplementary allowances. This includes a $2.1 billion new Schoolkids Bonus paid over five years. Longer term implications The global economic backdrop continues to be challenging and on the surface a return to a budget surplus appears to put a strain on the economy. Nevertheless with official interest rates remaining relatively high at 3.75% the RBA has significant scope to support the economy through further interest rate cuts should growth falter amidst the Governments efforts to return to a budget surplus.