Federal Budget 2022: The impact by sector

By Christopher Niesche

In its first Budget after winning the Federal election in May, the Albanese government worked hard to tackle continued cost-of-living pressures, despite the forecast for a worsening debt and deficit position.

Measures to alleviate the hike in the cost of living for many Australians include increased access to childcare subsidies, and cheaper medicines to help consumers with everyday expenses, while tax concessions for electric and hydrogen-powered vehicles and more charging stations will support the Australian Government’s decarbonisation agenda.

Other key budget measures include AUD 20 billion on new transmission infrastructure to support AUD 55 billion of investment in wind and solar power, and one million new homes to be built over four years.

In this exclusive analysis for Westpac IQ, Westpac Institutional Bank’s industry experts share their take on how the Budget will impact sector-by-sector across the economy.

Childcare

• AUD 4.7 billion over four years from 2022–23 to deliver cheaper childcare
• Increase in the maximum Child Care Subsidy (CCS) rate from 85 per cent to 90 per cent for families for the first child in care and increase in the eligibility to receive the CCS to AUD 530,000 or less in household income.

At face value the increase in the number of families eligible for the Child Care Subsidy and its maximum level are a positive for the childcare sector. But Westpac Institutional Bank childcare analyst Rebecca Hempenstall says the benefit to the sector will be limited by the ongoing staff shortages.

“If families are going to increase demand, childcare centres aren't going to necessarily be able to fulfil that,” she says.

The government is delaying the start of the scheme until 1 July next year to give the sector a chance to find more staff. And the planned increase in the annual permanent migration from 160,000 to 195,000 net migration is expected to start easing Australia’s labour shortage from some time in 2024, Hempenstall said

Longer term, the government has announced 1,500 subsidised places at university for early childhood educators and the sector will be able to access a portion of the 480,000 fee-free TAFE and vocational education places to be available over the next four years.

Health and Aged Care

• AUD 250 million for 50 Urgent Care Clinics across Australia
• AUD 1.4 billion over 4 years from 2022–23 for new and amended listings on the Pharmaceutical Benefits Scheme
• AUD 787 million over 4 years to decrease the patient co-payment for treatments on the Pharmaceutical Benefits Scheme from AUD 42.50 to AUD 30.00 from 1 January 2023
• Continuation of a fully funded National Disability Insurance Scheme at AUD 36 billion in 2022-23
• AUD 2.5 billion to improve the quality of care in residential aged care facilities by requiring all facilities to have a registered nurse onsite 24 hours a day
• A new Australian Centre for Disease Control to be established.

The 50 Urgent Care Clinics across Australia will treat problems such as broken bones and baby fevers and so are likely to reduce pressure on hospitals and their emergency departments.

“Having these urgent care clinics to address comparatively minor health emergencies that only require day visits frees up hospitals to treat more significant issues that attract higher margins and longer patient stays,” said Angus Caldicott-Chan, Westpac Institutional Bank health care analyst.

The expansion of the drugs included on the Pharmaceutical Benefits Scheme will include two new COVID drugs Molnupiravir and Paxlovid and will increase sales for pharmaceutical wholesalers. Additionally, the lower co-payment will prompt more prescription compliance by patients and so will also increase sales.

In addition to tackling the ballooning costs of the NDIS, the Budget factored in an extra AUD 126.3 million for a multi-agency fraud taskforce to address growing concern that the NDIS is being rorted.

The establishment of the Australian Centre for Disease Control could lead to more consistent approaches to health care across the different states, particularly in pandemic management, chronic disease, and the approach to managing chronic disease.

Aged care providers have welcomed funding to provide 24-hour-a-day nurses at aged care facilities, but Caldicott-Chan notes that there is already a shortage of nurses across the heath sector and so it will be a challenge to find the staff.

Renewables

• AUD 20 billion in funding to provide concessional loans and equity to invest in transmission infrastructure projects.
• AUD 327 million in support for Community Batteries and Solar Banks to store excess solar energy and assist households to reduce their power bills.

This year’s Budget prioritises initiatives that are aligned to the government's emissions reductions target, and also supports a transition to a clean energy future, said Pranoy Modi, Westpac Institutional Bank electricity sector analyst.

The AUD 20 billion plan to roll out 10,000 km of new transmission lines will unlock about AUD 55 billion in renewable energy investment and meet the government’s target for renewable electricity to make up 82 per cent of generation by 2030.

“It's really about enabling an electricity grid that can support a higher share of renewables,” says Modi.

Automobiles

• Exempting battery, hydrogen fuel cell and plug-in hybrid electric cars from fringe benefits tax and 5 per cent import tariffs from 1 July 2022 at a cost of AUD 350 million
• AUD 40 million over 5 years from 2022–23 to establish a National Electric Vehicle Charging Network to deliver 117 fast charging stations on highways across Australia, in partnership with the NRMA
• AUD 90 million over 6 years from 2022–23 for the Hydrogen Highways initiative to fund the creation of hydrogen refueling stations on Australia’s busiest freight routes.

Tax breaks for electric vehicles and more charging stations will boost the already growing demand for electric and hybrid vehicles in Australia, says Westpac Institutional Bank automotive industry analyst Finn Newsam.

However, this will be offset to some extent by the roll-off of the business tax write-off for small business capital expenditure and the forecast slowdown in consumer spending.

Additionally, says Newsam, the global shortage of semiconductors, including those used in electric vehicles will limit supply. “We expect these pressures to remain for the next two years or so, which will subdue revenue for new car dealers and fleet leasing.”

As a result of demand outstripping supply however, we anticipate elevated prices in the used car market will persist throughout this period, benefiting used car dealers and providing higher than normal end of lease income for feet leasing. Overall we see the result as mixed given the macro pressures on the industry.

Agriculture

• All up, AUD 1.2 billion for the agriculture sector, including:
• AUD 134 million to strengthen the biosecurity system, including the government’s capacity to prevent, respond to and recover from pest and disease outbreaks
• AUD 205 million for the forestry sector
• AUD 302 million to invest in sustainable agriculture through the Natural Heritage Trust and AUD 21 million to prepare for the next drought
• AUD 500 million from the government’s new AUD 15 billion National Reconstruction Fund for co-investment in agricultural businesses.

Westpac Institutional Bank agriculture analyst Scott Warburton describes the Budget as “slightly positive” for agriculture. “These measures are supporting the industry’s objective to grow to AUD 100 billion in farm gate output a year by 2030, by supporting investment while building resilience to biosecurity and climate risks” he says.

The government has also committed AUD 1.2 billion in water infrastructure to increase irrigatable land in Tasmania and Cairns, while scrapping the AUD 5.4 billion Hells Gate Dam project near Townsville.

The agriculture sector has been benefiting from favourable growing conditions and high commodity prices, however it has been constrained by a lack of workers. Warburton notes this may be alleviated somewhat by increased migration numbers and accelerated visa processing announced in the Budget, depending on the capacity to recruit through the Pacific Australia Labour Mobility scheme, which incorporates the prior short-lived Australian Agriculture Visa.

Property

• 1 million new homes from 2024
• AUD 350 million for 10,000 new affordable homes.

The target of 200,000 new homes a year from 2024 would need to go close to matching the highest achieved during the high-rise boom, which was 223,500 dwellings completed in the year to March 2017, so meeting the target would depend on the type of dwelling developed, according to Westpac Institutional Bank property analyst Frank Allen.

The delay to start from 2024 is probably to allow the construction sector to settle, as it’s currently struggling with labour and material shortages and surging costs. “Hopefully re-opening the borders and increasing population growth will help the labour factor and supply chain issues are less of a problem by 2024,” Allen says.

The funding for the 10,000 affordable homes works out at an average of AUD 35,000 a home and the government is hoping the superannuation sector will step in and fund the remainder. “It's a question of whether they'll see if that's a viable product, and whether it's giving them the right returns for their members rather than just providing a social benefit for the country,” Allen explains.

“The industry is looking and saying it's a nice idea, but is it actually going to get off the ground?”

The increase in net migration will add to pressure on the residential rental markets, particularly for units given the very low level of vacancy and low rates of new apartment construction over the past few years.

More broadly, Allen describes this year’s Budget as “non-stimulatory”. High interest rates and reduced demand from tenants will be the main factor influencing commercial property yields, he predicts.

Retail

• Budget forecasts growth to drop from 6.5 per cent to 1.25 per cent across 2023-2024.

Westpac Institutional Bank retail analyst Joel Yap anticipates a slowdown in consumer spending from higher cost of living pressures, along with the withdrawal of the low- and middle-income tax offset from next year, which will see people earning up to AUD 126,000 a year pay as much as AUD 1,080 in extra cash, and the end of fuel excise relief.

“Consumer spending and retail sales growth is expected to slow largely from next year as high interest rates flow through to household balance sheets in particular, as the large bulk of fixed rate mortgages roll off,” he says.

The balance of spending is likely to shift from discretionary goods such as clothing and services to household essentials. “We should see retailers starting to report slowing revenue growth and lower margins, in particular across second-half fiscal 2023 as consumers feel the pinch,” says Yap.

The planned increase in the annual permanent migration could assist in managing the retail industry’s skill shortage, which is currently running at about 46,000 vacancies.

In the grocery sector, the focus on the cost of living will indirectly deliver benefits by helping families meet the rising costs of their weekly shop, says Westpac analyst Sarah Cavallo. The pre-Budget decision to leave the Stage Three tax cuts intact will also support grocery retailing when they are introduced from July 2024.

However, Cavallo doesn’t expect an increase in actual consumption or demand, rather consumers will just maintain their grocery consumption levels.

Measures to ease critical labour shortages, including a lift in the permanent migration cap, will help the sector find staff and help keep a lid on wages inflation, Cavallo expects.

Tourism and Casinos

• AUD 48 million in tourism support, down from AUD 147 million in the May budget, including:
• AUD 10 million to attract international workers to the sector and AUD 10 million for upskilling
• AUD 10 million for wholesalers and exporters to attract international visitors.

Westpac tourism analyst Dom Newman describes this year’s tourism budget as modest. Like other sectors of the economy, tourism is suffering from a shortage of workers and the Budget measures could help alleviate that somewhat, as will the return of foreign students, who would be able to work part-time in tourism.

The AUD 10 million for wholesalers and exporters to attract international visitors could prove to be a benefit to the casino sector, if it increases foreign visitors.

Financial Institutions and Non-Bank Financial Institutions

• S&P Global Ratings reaffirmed Australia’s AAA credit rating and revised the outlook back to stable after cutting it to negative in June last year.

Inflation – which was running at 7.3 per cent in the September quarter – and the rising cash rate will affect loan serviceability, said Swati Ghosliya, Westpac Institutional Bank finance sector analyst.

By early next year, rising interest rates and cost of living pressures will weigh more heavily on households’ real disposable incomes. In addition, rising interest rates have also seen house prices begin to decline and with further falls expected, resulting in decline of household wealth and contribute to the slowing of consumption growth and is expected to impact bank’s asset quality.

SME lending more subdued with one of the reason underpinnings is the tax write-off for small business capital expenditure expiring next year. There are further challenges including difficult business conditions with the ongoing COVID-19 impact and extreme weather conditions that can impact serviceability. However, the budget includes a commitment towards investing in improving the energy efficiency of small and medium-sized businesses resulting in cost saving to offset the impact of rising energy costs, says Ghosliya.

Resources

• Continuing strength in prices for key export commodities
• AUD 1 billion to fund value-adding in the resources sector.

High prices for some of Australia’s key commodity exports, including thermal coal and natural gas, are providing a boost to the Budget bottom line, but they are not expected to last.

The Budget anticipates price declines over the next five months of 50 per cent for iron ore and metallurgical coal, 85 per cent in thermal coal and 33 per cent in natural gas.

However, Westpac resources analyst Graham Smith said the forecasts are conservative and the thermal coal and natural gas declines don’t align with the Budget forecasts for a 50 per cent increase in household energy costs over the next two years.

“I'd expect that revenues will continue to come in higher than expected,” Smith says.

The AUD 1 billion from the National Reconstruction Fund for value-adding in the resources sector will have only limited impact, because a billion dollars isn’t a large amount for these types of projects, Smith notes. For instance, one planned lithium hydroxide processing facility in the Pilbara has announced upfront cost of AUD 1.3 billion.

“But there are other high technology minerals, such as high purity alumina and high purity quartz, that are very immature in the Australian market and are going to be vital to the transition story as we go forward. So they'll certainly be trying to tap into those funds,” Smith says.

Westpac Institutional Bank oil and gas industry analyst Grant Jepson said that given the government’s focus on renewable energy, it was unsurprising that there was nothing in the Budget for the sector. Industry players will be disappointed that the Budget didn’t provide the sector with any certainty for the future, Jepson says, adding that the Budget also failed to address energy security.

Infrastructure

• Last year’s infrastructure spending pipeline maintained
• AUD 6.5 billion in infrastructure spending to be delayed
• AUD 500 million to plan the Sydney to Newcastle High Speed Rail
• AUD 2.2 billion for the Suburban Rail Loop East.

Infrastructure spending was increased by AUD 17.9 billion in last year’s Budget and, while the headline number remains the same, Westpac Institutional Bank infrastructure analyst Deshan de Silva says AUD 6.5 billion of that spending has been delayed by four years or more to take the pressure off the construction sector.

“It's not being taken out of the Budget. They’ve kept the 10-year commitment to AUD 120 billion,” he says.

The government has also allocated some of the infrastructure spend to projects, including AUD 500 million for planning, corridor acquisition and early works for the Sydney to Newcastle High Speed Rail, which would cut travel time between the cities to 45 minutes.

It is also allocating AUD 2.2 billion for the Suburban Rail Loop East in Melbourne, a major construction project that de Silva says will run until about 2035.

Telcos

• AUD 2.4 billion to NBN Co over 4 years from 2022–23 to upgrade the National Broadband Network (NBN) to deliver fibre-ready access to a further 1.5 million premises by late 2025.
• AUD 758 million over 5 years from 2022–23 to improve mobile and broadband connectivity and resilience in rural and regional Australia.

The additional investment in the NBN provides nearly 90 per cent of Australia’s fixed line footprint with fibre access to the network by late 2025.

Jien Goh, Westpac Institutional Bank telecommunications sector analyst, says the spending will better future-proof the network and is in line with the government’s recent decision to retain the network rather than sell it to the private sector.

The additional investment will reduce barriers to entry and competition for telcos in the fixed-line broadband market, but more influential for their future profitability and margins will be the government’s NBN pricing changes expected to be introduced next calendar year.

Defence

• Defence spending to remain steady
• Over half a billion AUD in investment in support services for veterans and their families
• AUD 213.3 million over five years in military assistance to the Ukraine, including Bushmaster Protected Mobility Vehicles, armoured personnel carriers, lightweight towed howitzers and other military equipment.

This year’s Budget contains no increase in the trajectory of defence spending announced in previous Budgets, with any changes pending the outcome of the Defence Strategic Review due early next year, says Westpac Institutional Bank defence sector analyst Denise Cheah.

This Budget called out specific measures for veterans such as AUD 233.9 million over four years for the recruitment of over 500 staff to speed up compensation claims processing, AUD 87 million over two years to improve veterans access to support services (IT system), AUD 46.7 million investment in 10 new Veterans and Families’ Hubs across Australia, AUD 46.2 earmarked to assist veterans with home purchasing through the defence home ownership assistance scheme and AUD 97.9 million for AUD 1,000 increase in the annual rate of Totally and Permanently Incapacitated Payment from 1 Jan 23 to help with rising cost of living.

The provision of military equipment to the Ukraine is a positive for the defence materials sector, as that equipment will need to be replenished and maintained, which will support demand in the near term, Cheah says.

Higher Education

• AUD 485 million to support 20,000 new university places across a range of skill shortage areas such as nursing, healthcare, engineering, science, technology and maths.
• Extra places will also be given via demographic circumstances, including rural Australians, people on lower incomes and indigenous students. 
• AUD 10,000 incentives for high-achieving students to study teaching.

Skilling up Australia with a focus on addressing the rising need to fill the skills shortage was a key measure. However, tackling the prevailing teacher shortage with substantial monetary incentives for students to become educators is one of the more interesting moves in the Budget for the higher education sector, says analyst Angus Caldicott-Chan.

The measure is specifically designed to attract high quality teachers, he says, as it will apply to students with ATARs (Australian Tertiary Admission Ranks) of over 80.

The industry analysts quoted in this article are from Westpac Institutional Bank and are not independent research analysts.