Federal Budget 2021: Analysis by sector

Job creation is at the heart of Federal Budget 2021-22 with a target of a quarter of a million new jobs across Australia over the next two years.

The government is creating more employment opportunities with economic stimulus measures including AUD 7.8 billion in personal income tax relief, AUD 20 billion in tax breaks for business over the next four years and significant spending on aged care, mental health and disability services.

This spending is likely to support the economy and benefit sectors including property, retail and banking. But beyond the sweeping jobs target, some sectors will be more directly affected by this year’s Budget.

The standout is the aged care sector’s AUD 17.7 billion funding boost, which provides extra cash but also places new obligations on aged care providers.

Some AUD 15 billion in additional infrastructure spending over the next decade goes substantially to road and rail projects and is expected to be welcomed by contractors, but the government is still relying on the private sector to make the majority of the investment required for infrastructure for future years.

Meanwhile, the tourism and aviation sectors, as well as tertiary education, look unlikely to achieve full lift-off over the next year due to a lack of international visitor and student numbers, with the probability that international borders will remain closed until mid-2022.

Mining

• Extension of the Investment Allowance providing for immediate depreciation on capital investment of business assets and Temporary Loss Carry-back program
• A four-year AUD 100 million extension to the Junior Minerals Exploration Incentive.

Record iron ore prices and high prices for many other hard commodities provide the backdrop to this year’s Budget, with the mining sector forecast to spend AUD 36 billion on capital investment in the current year, which is around 30 per cent of total national capex. As such, the extension of the government’s investment incentives could prove a benefit to miners, says Westpac Institutional Bank Director Natural Resources, Anthony Wallace.

Small mining explorers are likely to benefit from the extension of the Junior Minerals Exploration Incentive, which provides a tax incentive for investment by companies that are raising capital to fund greenfield exploration activity for resources.

Wallace says that over the past three years the scheme has provided AUD 70 million worth of tax credits, which have assisted with AUD 340 million of additional capital raisings, making the extension of the scheme “a real positive” for junior explorers.

Since the release of the Budget, the government has released details of local support for refineries.

Some AUD 302 million will be spent supporting infrastructure upgrades to enhance production of better quality fuels, while refiners will receive a production subsidy when the refining margin drops. The government says the support will ensure Viva’s Geelong refinery and Ampol’s Lytton (Brisbane) refineries remain operating.

Banks and non-bank financial institutions

• Increase to AUD 50,000 from AUD 30,000 for the amount of money first-home-buyers can take out of their superannuation accounts to purchase a home
• The Family Home Guarantee provides 10,000 places from 2021-22 to support single parents to buy a home with a deposit of as little as two per cent
• The First Home Loan Deposit Scheme provides an additional 10,000 places in 2021-22 to allow eligible first-home-buyers to build a new home, or purchase a newly constructed home sooner, with a deposit of as little as five per cent.

The Budget’s aim of job creation and significant spending could help banks and non-bank financial institutions by supporting businesses and consumers to make their loan repayments, says Joanna Wang, Westpac Institutional Bank financial institutions analyst.

It could also support continued credit growth.

Specifically, on the housing sector and home lending, the concessions to help with affordability could benefit lenders. “These measures will potentially increase the number of first-time buyers taking loans to build or purchase homes, although the number is expected to be small,” says Wang.

Finally, the government is dropping the age at which people can make a one-off, post-tax contribution to their superannuation of up to AUD 300,000 after selling their house from 65 years to 60 years. This could increase housing supply – and hence lending – as more people are incentivised to downsize the family home. However, it is unlikely to be a gamechanger, as the primary drivers to downsize tend to be personal lifestyle considerations rather than a one-off boost to superannuation, Wang says.

Electricity and renewables

• Allocation of up to AUD 215 million over six years from 2020-21 to support investment in new dispatchable generation, such as gas-fired power plants
• AUD 1.6 billion over 10 years from 2021-22 to incentivise private investment in technologies to reduce emissions, grow new export industries and create jobs.

The government is making modest investments to support new dispatchable generation capacity, including gas-fired power plants in Port Kembla and the Illawarra, south of Sydney. However, the Budget is making only small contributions to the capital that will be required for the projects, says Westpac Institutional Bank energy analyst Wayne Gagel.

“It’s very clear that the government is relying heavily on the private market to fund those things,” he says.

Since the Budget, the NSW government has announced it will contribute AUD 83 million in funding to the Tallawarra B gas-fired power station in the Illawarra and owner Energy Australia has committed to offset the emissions over the life of the plant, making it carbon neutral.

It’s a similar story with the emissions reduction technology incentives, which will provide only a fraction of what’s needed for the development of energy technologies, including hydrogen.

However, Gagel says: “At this stage, the sector probably doesn't need much support because we do have quite a lot of capital trying to try to find a home in renewable energy assets.”

Infrastructure

• AUD 15 billion in new infrastructure spending, on top of the AUD 110 billion announced in previous budgets.

Most of the infrastructure spending is targeted at road and rail projects and social infrastructure, and much of the spending is for upgrades and expansions.

Projects include the North-South Corridor road project linking Adelaide to the rural area around the Barossa Valley, and the new Melbourne Intermodal Terminal in Victoria to increase efficiency and capacity of the national freight rail network.

Westpac Institutional Bank infrastructure analyst Deshan de Silva describes the spending as a “catch up” from last year, when just AUD 5.7 billion in new infrastructure spending was announced, much lower than the AUD 25 billion the year before. He also noted that in previous budgets, the funding allocations had been underspent by about AUD 2 billion a year.

Overall, the additional spending could enable project development by the private sector and create investment opportunities.It may also result in “significant growth” across the contractor industries, as long as the planned infrastructure budget is executed in line with the previously mentioned estimates, adds Westpac Institutional Bank analyst Divan du Plessis.

Agribusiness

• Total of AUD 850 million in new agricultural sector spending
• AUD 370 million in biosecurity measures to stop the spread of pests and diseases
• AUD 60 million to reduce emissions from livestock and with improved soil management.

Compared with previous years, this year’s Budget is likely to have a more modest impact on the agribusiness sector, says Westpac Institutional Bank agribusiness analyst Andre Larsson.

Much of the AUD 850 million in Budget measures is aligned with the government’s Ag2030 plan, which aims to increase the size of Australia’s agricultural sector from about AUD 61 billion today to about AUD 100 billion by 2030.

Farmers could also benefit from the extension of business investment incentives for another 12 months. However, the sector may still struggle to find enough farm workers due to border closures and would have been hoping for more in relation to a new international trade strategy to deal with the fallout from Australia's deteriorating relationship with China, Larsson says.

Airlines and tourism

• International borders likely to remain shut until mid-2022.

The aviation sector is already the recipient of previously announced government support to help it through the COVID-19 crisis. This includes a jobs package to ensure airlines retain flight-ready crews and maintain international aircraft in preparation for the return of overseas travel, along with funding to ensure up to 5,000 ground-handling staff maintain their skills.

As such, says Westpac Institutional Bank aviation analyst Jien Goh, there was little new for them in this year’s Budget.

Airlines and leisure travel are both highly dependent on international borders reopening.

“The main issue is the lack of certainty on the reopening of international borders with the mid-2022 target, which is subject to vaccine rollouts,” says Westpac Institutional Bank tourism analyst Betty Song.

Domestic travellers also need to be confident that state borders will remain open at the start and end of their trip.

Border issues are out of the purview of the Budget. Nonetheless, it suggests that Australia’s international borders are expected to remain closed until mid-next year and a quarantine program will remain in place, limiting overseas arrivals. This is later than many people previously had expected.

The Budget does, however, leave the door open for more travel bubble arrangements, like the one with New Zealand.

It also extends the Consumer Travel Support Program for businesses such as travel agents, and attractions such as zoos and aquariums, but beyond that there is little new for the tourism sector.

Domestic travel operators will be better placed and could be supported by the tax cuts for low- and middle-income earners. However, they seem likely to still be challenged by a lack of foreign tourists and foreign workers, Song says.

Casinos and gaming

• Border closures will continue to have a profound impact on the casino sector’s VIP demand, but this may also drive higher domestic activity
• Digital Games Tax Offset to provide a 30 per cent refundable tax offset up to AUD 20 million a year for qualifying Australian non-gambling digital developers.

COVID-19 and the prolonged border closures have almost wiped out the industry’s VIP demand, which is highly dependent on international visitors. Casinos seem likely to be impacted by international borders not reopening until mid-2022, as suggested in the Budget.

This may also delay Australian casinos’ new focus on the international premium mass market, instead of high rollers – this new strategic shift is the industry’s response to mitigate the already subdued VIP program, says Westpac Institutional Bank analyst Sunny Yen.

However, the extended travel ban also means fewer Australians will travel overseas. With limited options, there’s an incentive for Australians to put their discretionary spending this year towards domestic casino resorts as an alternative leisure option, as we have already seen higher domestic spending per patron since venue capacity was relaxed across different states.

Australia’s casino sector has seen very solid domestic activity, and the industry is quite self-sustainable from domestic demand alone. That said, without the global containment of COVID-19 and international tourism to boost its turnover, the industry still has a long way to go towards a full recovery, says Yen.

The government is also providing support for non-gambling digital game developers, such as mobile apps, web-based and the traditional PC games. These games garnered increased attention from users during the COVID lockdowns, which led to higher user spends and engagement. The tax offset signals that “the government sees a huge potential to develop this very fast-growing industry to promote innovation, development and job creation,” Yen says.

Retail and groceries

• AUD 7.8 billion in extended tax relief to benefit 10.2 million low- and middle-income earners
• The tax relief will incentivise more discretionary spending this year, in contrast to the elevated demand in essential goods and services we observed in the prior year.

Last year, the COVID-19 stimulus package and Budget tax cuts were mostly spent on essential household items during the COVID lockdowns, to cater for increased in-house consumption and work-from-home needs.

“This year we are seeing a reversing of the trend because of better COVID-19 containment and much improved consumer sentiment and economic outlook, which has led to a sharp fall in the high savings rate that we experienced last year, and we will see a higher portion of spending on discretionary and recreational activities this year,” Westpac Institutional Bank analyst Sunny Yen says.

There are already signs that demand for groceries has fallen from last year, and the Budget forecast that net immigration will fall for the first time since 1945 could further weaken the industry’s growth prospect.

Westpac Institutional Bank retail analyst Neha Fernandes says that as more people are vaccinated, any lockdowns to contain coronavirus outbreaks will likely be shorter, thereby supporting the retail sector. However, a full recovery for the wider sector depends on international borders reopening.

Income tax relief will work out at AUD 1,080 a year for some individuals. This, combined with the AUD 1.7 billion towards childcare subsidies, is likely to further boost retail spend as Australians see their discretionary income rise, says Fernandes.

Automotive

The Budget didn’t contain any measures aimed specifically at the auto industry, but could indirectly and modestly benefit the sector, says Robert Stephenson, Westpac Institutional Bank auto analyst.

The low- and middle-income earners’ tax breaks will put a little more money into consumers’ pockets and the instant business asset write-off extension could make it easier for businesses to buy a new vehicle.

However, any increase in sales will come on the back of already very high demand for cars, as more people transition to their own vehicles and away from ride-sharing and public transport, Stephenson says.

Property

• AUD 774.8 million to extend the start-time of the HomeBuilder program to support homeowner renovations or build a new home with $25,000 grants
• AUD 256.5 million over four years for the Building Better Regions Fund to support investment in community infrastructure.

Commercial property could be supported by the Budget’s jobs creation focus, which would create greater need for space as the number of workers rises, says Westpac Institutional Bank property analyst Frank Allen.

In particular, the Budget’s focus on ensuring the supply chain is resilient through the backing of science and technology and encouraging companies to base R&D laboratories in Australia could create demand for specialised industrial property.

Additional funding for the Building Better Regions Fund may support property and infrastructure development outside of major capitals and encourage more businesses to expand into some of these regional areas.

In the residential property sector, the extension of the Homebuilder start time could be of benefit to the construction sector, following the difficulties many builders experienced in finding workers to complete Homebuilder projects, Allen says. The grant is no longer available for new applicants, so as it has likely pulled forward demand, land sales could slow through 2021.

“Job creation, in addition to low interest rates, will continue to support the residential market and – with Westpac Economics forecast of 15 per cent residential property price growth this year – investors are likely to find this attractive, particularly while interest rates remain low,” Allen says.

Meanwhile, Allen believes the extended international border closures may continue to hamper the development of high-rise properties, particularly in city centres or areas that have traditionally housed international students.

Aged care

• New aged care funding of AUD 17.7 billion over five years
• 80,000 new home care packages, at a cost of AUD 6.5 billion
• An additional payment of AUD 10 per resident per day to enhance the viability and sustainability of the residential aged care sector at a cost of AUD 3.2 billion
• AUD 3.9 billion to increase the time nurses and carers are required to spend with residents
• AUD 650 million to grow skills in the sector
• Investment to drive systemic improvements of AUD 942 million.

The AUD 17.7 billion aged care package was one of the major initiatives in this year’s Budget. “The Government is committed to reforming and improving quality standards and regulations within the Aged Care sector,” says Westpac Institutional Bank health and aged care analyst Daryl Hatting.

The additional funding comes ahead of the government’s response to the Final Report of the Aged Care Royal Commission.

Despite the extra spending to develop the aged care workforce, finding enough workers could remain a challenge while international borders remain closed, Hatting believes.

Health

• AUD 1.9 billion over five years to distribute and administer COVID-19 vaccines
• AUD 204.6 million for the extension of temporary telehealth MBS services to December 2021
• AUD 13.2 billion provided over four years to support the NDIS
• AUD 2.3 billion committed to new mental health funding.

This Budget shows that “the government has identified the Australian economy’s reliance on health sector services to recover,” says Westpac Institutional Bank health and aged care analyst Daryl Hatting.

In addition to AUD 1.9 billion over five years for the administration of the COVID-19 vaccine, the Budget provides AUD 204.6 million for the extension of telehealth MBS services to December 2021, which could be a win for general practitioners who use these services. Likewise, pathologists could benefit from AUD 557.1 million to extend Medicare-funded testing and detection of COVID-19.

Disability services providers will benefit from the additional AUD 13.2 billion provided over four years to support the National Disability Insurance Scheme, which is a big win Hatting says.

Suicide prevention has also been recognised as a national priority, with AUD 2.3 billion committed to mental health and suicide prevention over the next four years.

Higher education

• AUD 17.7 million extension of regulatory fee relief
• AUD 26.1 million over four years for an extra 5,000 short course places at non-university providers
• AUD 9.4 million in grants for private providers to grow online / offshore education delivery models.

There was modest assistance for universities in this year’s Budget, with the main feature being an extension of regulatory fee relief worth AUD 17.7 million across the sector, including university and private and non-university higher education providers.

“It’s pretty immaterial in terms of the size of the sector,” said Westpac Institutional Bank education analyst Aaron Bell.

Universities’ main source of government funding is the Commonwealth Grants Scheme, which is based on domestic student numbers. Grants are forecast to be flat in the 2022 fiscal year, followed by 4.4 per cent decline in 2023 because of a lower number of 18-year-olds across the country.

“Most of the direct support is for non-university providers,” Bell said.

Private and non-university providers received other assistance, including AUD 26.1 million over four years to help them attract more domestic students through an additional 5,000 short course places in 2021; and AUD 9.4 million for grants of up to AUD 150,000 to English language education providers to support online and offshore education delivery models.

IT, digital and cyber defence

• AUD 1.2 billion on Digital Economy Strategy, including spending on enhancing Australia’s artificial intelligence capability, and investing to build digital opportunities.

The proposed Digital Economy spend will likely create some contract opportunities for suppliers of IT equipment and services, says Westpac Institutional Bank digital sector analyst Jonathon Trewavas. The investment in digital skills could also be of some benefit to the sector in the longer term, he says.

The Budget is providing an additional AUD 1.9 billion over the decade to strengthen national security, law enforcement and intelligence agencies and this could help the cyber security and cyber intelligence industry to boost technical capabilities.

As with other fixed-capital reliant industries, the instant access write-off could also prove a benefit to defence contractors more broadly.

“The industry analysts quoted are from the Customer Insights and Analytics team at Westpac Institutional Bank and are not independent research analysts”.