This year’s Federal Budget is a socially responsible, big spending one aimed at embedding the economic recovery.  With interest rates already set at emergency levels, it makes sense for Treasury to step up and stimulate the economy.  

But that big spending will come at a cost to future generations as the ballooning debt will eventually need to be repaid.

Australia is coming back

Josh Frydenberg is right; Australia is coming back. The v-shaped economic recovery has exceeded all expectations.  The Covid recession in the end amounted to a contraction of just 2.5 percent.  We have already recovered that, and the outlook is terrific.

Next financial year the economy is forecast to grow 4.25 percent and moderate the following year to 2.5 percent.

Hey, Big Spender

The key measures in the Budget are designed to stimulate the economy and address much needed social reform.  Further personal income tax cuts for low- and middle-income earners of up to $1,080 per taxpayer were announced as well as business tax concessions amounting to over $20 billion.

There will also be record funding for schools, hospitals, aged care, mental health and the NDIS.  In response to the horrors of the Royal Commission into Aged Care, there will be much needed reform in the sector costing almost $18 billion over five years. This will include $6.5 billion for Home Care Packages and $7.8 billion for a new funding model for residential aged care.

More flexibility in super

Changes to super will help retirees and people transitioning to retirement.  The home downsizer provisions have been extended to people aged 60 years.  This will enable people transitioning to retirement to boost their super by up to $600,000 per couple when they sell their home.

And the work test requirement for super contributions is being loosened for people aged 67 to 74 years.  This will allow retirees or those working casually to make after tax contributions to their super.

Retirees should also keep in mind that the temporary reduction of minimum account-based pension payments will end on 30 June.  Next financial year normal payment levels will apply again.  We think that’s okay because markets have recovered so you probably won’t be selling your investments at depressed prices to meet the requirements.

The long-term cost

But all of these stimulus measures are coming at a high cost.  For the foreseeable future, Australia will run a deficit, meaning we’re spending more than we earn.  This year we will overspend by $161 billion and next year by just over $106 billion. As a result, our national debt will balloon to unprecedented levels.  Within four years, Australia’s debt will exceed 40 percent of economic output.

Like a household overspending, it’s an unsustainable situation that will need to be addressed in the long run.  It will be up to future generations to pay back the debt. And that will undoubtedly require higher taxes and lower spending on public services and infrastructure.

Remember, at When Financial Solutions we try to ensure our clients make the most of their financial opportunities.  So, if you partner with us, it’s not a matter of ‘if’ you will make the most of the Budget changes, but ‘when’.

Michael Bowman and James McMaster are co-founders of When Financial Solutions.  This article is general and does not consider your personal circumstances so it may not be appropriate to you.  If you would like advice specific to you, please give us a call.