Federal Budget 2024-25: The impact by sector

Cost-of-living relief and turning Australia into a green energy superpower are the centrepieces of the 2024-25 Budget.

Treasurer Jim Chalmers handed down his third Budget against a backdrop of high inflation and at a time when consumers and businesses are feeling the weight of 13 interest rate hikes.

The Budget promised AUD 8.8 billion  in cost-of-living relief measures, including electricity bill rebates for households and small businesses, a freeze on the price of medicines, and higher rent assistance payments. Where last year’s cost-of-living measures were aimed at low-income earners and welfare recipients, this year’s initiatives are more widely distributed.

The government is hoping these measures, along with around AUD 20 billion a year in Stage 3 tax cuts, will put more money into consumers’ pockets. Chalmers also expects the cost-of-living measures to help reduce inflation by 0.75 percentage points, from 3.5% in 2023-24 to 2.75% in 2024-25, possibly paving the way for interest rate cuts.

Longer-term, the government is spending AUD 22.7 billion over the next decade to attract and enable investment in the net-zero economy, particularly hydrogen. The Future Made in Australia plan aims to help Australia take advantage of its natural resources to become a renewable energy superpower.

In the meantime, higher-than-expected prices for thermal coal and iron ore have helped the Budget to its second consecutive surplus.

In this report, Westpac Institutional Bank analysts consider the likely impact of the measures in the Federal Budget for 2024-25 sector by sector.

Consumer spending

• Rejigged Stage 3 tax cuts to deliver permanent annual tax cuts averaging AUD 1,888 to 13.6 million taxpayers
• AUD 300 energy rebate for all households and AUD 325 for a million small businesses, at a total cost of AUD 3.5 billion
• AUD 1.9 billion over five years to increase the maximum rates of rent assistance by 10 per cent, following a 15 per cent rise in last year’s Budget.
• Prices for medicines listed on the Pharmaceutical Benefit Scheme (PBS) will be capped at AUD 31.60 for another year and at AUD 7.70 for pensioners and concession card holders for five years.

Australian householders have been struggling under the weight of elevated inflation, high interest rates, rent increases and higher personal income tax due to bracket creep.

The resulting weak household consumption has been a challenge for retailers, with some discretionary retailers reporting flat or negative like-for-like sales growth.

As such, Westpac Institutional Bank analyst Adam Wimberley expects the various cost-of-living measures will provide a boost for discretionary consumer spending. “The discretionary retailers will start to improve from going backwards to being slightly positive,” he says.

“Consumer spending has been a focus of the government for the past few budgets. It will be interesting to watch how consumer spending tracks over the next 12 to 18 months, and whether what they've introduced is sufficient to get consumers spending again, because the government's decisions had to balance supporting consumers, but also not driving inflation.”

Financial institutions and Non-bank financial institutions

• Banks and NBFIs are facing margin squeezes
• Cost-of-living measures will somewhat alleviate pressure on households and improve loan serviceability
• Increased government spending on defence, health, aged care, and renewable energy will help diversify banks’ loan books.

Higher interest rates and growth in loan books have increased lending revenue for banks and non-bank financial institutions.

But the higher interest rates are also pushing up funding costs and squeezing interest margins. “Coupled with the inflationary environment, this has led to reduced profit and higher cost-to-income ratios for all four major banks,” says Westpac Institutional Bank analyst Stanny Sidana.

Additionally, a reduction in real household incomes, thanks to high inflation and rising debt servicing costs, continues to impact the financial services sector. Higher loan impairments and increased credit provisions are causing asset quality to deteriorate. With their smaller scale, non-bank lenders are facing higher margin pressures, higher cost of funds and increased competition.

The cost-of-living relief measures in the Budget will alleviate some cost pressures on households and small businesses and will somewhat improve debt serviceability and borrowing capacity.

But, Sidana says, Westpac doesn’t expect meaningful improvements until inflation has returned to the Reserve Bank of Australia’s target range of 2–3 per cent and interest rates come down.

Elsewhere, larger banks are likely to benefit from the diversification of their loan books into sectors that are significantly supported in this year’s Budget, including defence, health, aged care, and renewable energy. The Future Made in Australia initiative is also expected to translate into an upswing for sustainable finance with an increased number of sustainability-focused loans.

As announced in the budget, superannuation payments on government funded Paid Parental Leave (at a cost of $1.1bn over the next four years and then $0.6bn per year ongoing), coupled with the superannuation guarantee contribution increase from 11% to 11.5% from 1 July 2024, are expected to boost assets/funds under management for Superannuation Funds and Asset Managers and consequently drive an increase in asset investment and fee/investment revenue. 

Renewable energy

• AUD 6.7 billion hydrogen production tax incentive
• AUD 1.7 billion over 10 years to the Australian Renewable Energy Agency (ARENA) for the Future Made in Australia Innovation Fund to accelerate renewable hydrogen, green metals, low carbon liquid fuels and other renewable energy industries
• AUD 1.5 billion over 7 years to ARENA to accelerate growth in renewable energy technologies and industries
• AUD 1.4 billion over 11 years to support manufacturing of clean energy technologies
• AUD 4.5 billion loan to Snowy Hydro and AUD 2.6 billion in equity to support the construction of Snowy 2.0.

The government’s large spend on renewable energy initiatives and reaffirming Australia’s greenhouse emissions targets is an important signal of its commitment to the sector, says Westpac Institutional bank analyst Pranoy Modi.

Much of the funding is aimed at realising Australia’s ambition to be a hydrogen production superpower.

The hydrogen production tax incentive will consist of an AUD 2 per kilogram incentive for up to 10 years of a project. The tax incentive’s success in kickstarting a commercial hydrogen industry will ultimately depend on the cost of production, Modi says.

ARENA is an established government agency with expertise in assessing opportunities, he notes, so is well-placed to seek out and support the right initiatives.

Resources

• AUD 7 billion for a 10 per cent production tax credit for downstream processing of 31 critical minerals
• Help with exploration, with additional funding for Geoscience Australia’s publicly available geological database mapping, and an AUD 466m partnership in the US Landsat NEXT project to provide high resolution geophysical data. 

The government is trying to increase the refining and processing of critical minerals in Australia, with the tax credit available for 10 years per project between 2027-28 and 2039-40.

But Westpac Institutional Bank analyst Graham Smith questions how effective this will be.

Most of the listed minerals are produced as secondary by-products from the refining of more common metals, which generally require high energy, sulphur dioxide and carbon dioxide emission intensive processes, and these processes will have to contend with both high energy costs and the carbon price.

Processing industries will still be incentivised to locate in jurisdictions with lower energy costs and different appetites for carbon-intensive industries, such as the United States. In Arizona, where the all-in tax rate is 26 per cent, the electricity price is less than half that in Australia, and gas is available at AUD 5 per GJ vs AUD 12 in Australia.

“This announced credit will act as a sugar hit to larger producers that already have established or planned processing facilities in place like BHP, but it’s unlikely to drive material growth in Australia’s critical mineral supply chain infrastructure,” Smith anticipates.

However, help with mineral exploration is more significant and will go some way to making up the underinvestment in grassroots exploration in recent years, he says.

Westpac Institutional Bank analyst Grant Jepson says the Budget was a little disappointing for the oil and gas sector. Although the government released its Future Gas Strategy in the week leading up to the Budget, there was little detail on what it would mean for the sector.

Nonetheless, he says the industry is in “rude good health”, given high energy prices. More of a concern is the uncertain regulatory environment in the wake of various market interventions by the government in recent years.

Infrastructure

• AUD 120 billion 10-year infrastructure pipeline, unchanged from last year
• AUD 4.1 billion over seven years for 65 new priority infrastructure projects.

The government is pursuing what it calls a Considered Infrastructure Investment policy, which it says is a more strategic and sustainable approach to selecting projects.

Western Sydney is the big winner from the new priority projects, with AUD 1.9 billion in projects to unlock the economic potential and support the new Western Sydney Airport.

Existing projects are also receiving additional funding, with AUD 3.3 billion for North East Link in Victoria and AUD 1.5 billion for the Sunshine Cost rail link to be built before the 2032 Brisbane Olympic Games.

Taken all together, this year’s budget is neutral for the infrastructure sector, with the government trying to balance its infrastructure priorities against further fuelling inflation, says Westpac Institutional Bank analyst Eric Fang.

Defence

• Increase in defence spending to AUD 55.7 billion in 2024-25, up from AUD 52.8 the previous year
• Additional AUD 50 billion in defence spending over the next decade.

Increases in the defence budget will keep spending on the sector slightly above 2% of GDP in the next few years, with a target of 2.4% of GDP over the next decade.

Near-term spending is aimed at supporting the AUKUS program to build nuclear submarines for Australia and to improve submarine bases, says Westpac Institutional Bank analyst Jonathan Vakirtzis. Funding includes AUD 102 million over seven years to support the construction of the subs and AUD 17.2 million next year to expand Australian industry participation in the submarine-building supply chain.

Despite the assistance, the bulk of the submarine contracts in the near-term will go to foreign defence contractors due to the lack of relevant skills in Australia for building the nuclear-powered vessels, Vakirtzis says. However, AUD 102 million is allocated to skill-up the local workforce to maintain the subs and this will help local industry play a larger role in the medium term.

“It’s all designed around trying to get increased scale and competitiveness for the local operators,” Vakirtzis says.

Beyond the submarine program, longer-term spending is aimed at uplifting the Australian Defence Force’s preparedness, including long-range strike capability, and modernising the Royal Australian Navy.

Health

• AUD 2.8 billion over five years to strengthen Medicare, including AUD 1.2 billion to alleviate pressures on the hospital system 
• Pharmaceutical Benefits Scheme (PBS) co-payment for prescription medicines to be frozen for one year and for five years for pensioners and other Commonwealth concession card holders at a cost of AUD 470 million 
• AUD 3.4 billion over five years for new listings on the Pharmaceutical Benefits Scheme
• AUD 469 million over five years to get the National Disability Insurance Scheme back on track.

The government is trying to ease pressures on Australia’s hospital system with the addition of 29 new Medicare Urgent Care Clinics to bring the total number to 87. It is also helping older Australians make an easier transition to aged care by avoiding hospital admission and helping those who are in hospital to be discharged earlier into other forms of care.

Students in nursing, social work and midwifery will receive AUD 319 a week to support their practical training placements, which Westpac Institutional Bank analyst Luke Gleeson says should help reduce staffing shortages across the health sector over time.

Freezes on consumer prices in the Pharmaceutical Benefits Scheme (PBS) and the inclusion of additional medicines will assist with cost-of-living pressures in regard to the cost of prescription medicines, Gleeson predicts.

Additional funding for the NDIS includes AUD 84 million over two years to fight fraud and AUD 130 million over two years for design and consultation work to respond to the findings of the independent NDIS review.

The Budget also provides for the establishment of an NDIS Evidence Advisory Committee to deliver independent and transparent advice to government on the efficacy and cost-benefits of types of support funded by the NDIS, with the aim of returning the NDIS to its original intent.

“There's going to be a higher level of industry oversight from the government,” says Gleeson of the reforms.

Aged care

• AUD 2.2 billion over five years for aged care reforms and to implement recommendations from the Royal Commission into Aged Care Quality and Safety
• This includes AUD 531 million for 24,100 additional home care packages in 2024–25
• A commitment to fund a pay rise for workers in the aged care sector after the Fair Work Commission handed down its final decision of the Aged Care Work Value Case. 

The aged care priority in this year’s Budget centres around the continuing implementation of the Royal Commission aged care reforms, including the introduction of 24/7 nurses at facilities; at least 200 minutes of care per resident per day on average, covering 40 minutes   of nursing care; plus the ongoing development of a star rating system for residential aged care facilities. 

These reforms have been in place since 2022 and 2023 and the additional Budget funding aims to ensure they are implemented uniformly across the aged care sector.

Westpac Institutional Bank analyst Luke Gleeson expects the additional home care packages will cut wait times down to about six months and reduce demand for residential aged care places.

The Fair Work Commission handed down its final decision of the Aged Care Work Value Case. This includes further pay rises of up to 13.5% for aged care awards. The government has committed to fund the pay increases, but has applied to have that increase delayed due to concerns a large pay jump could fuel labour shortages in other industries. Government-owned facilities will receive government funding, but private facilities will have to fund the wages increase themselves. “Wages typically make up 70 per cent of aged care costs, so that'll be a material increase for aged care providers,” Gleeson says.

Childcare

• The Budget sets aside funding for a pay rise for childcare workers, once the Fair Work Commission has determined the size of the increase
• AUD 30 million for upgraded IT systems
• AUD 98 million to help childcare services increase their support for children with additional needs.

Higher pay for childcare workers should help the sector manage labour shortages, which are one of the major problems in the sector.

Westpac Institutional Bank analyst James Schmiede says the wage increase is viewed very positively by the childcare sector and should see the return of some workers who had previously left the industry for better paid jobs elsewhere. “It's really trying to attract and retain employees to build capacity in the sector,” he says.

While higher wages will lead to higher costs for childcare centre operators, Schmiede expects a net benefit because they will more easily find workers.

The Government will invest to upgrade their IT systems to deliver on the commitment that the pay rises are passed directly on to workers.

The Budget also increases compliance and administration requirements in the sector to save AUD 100 million a year from fraud and money laundering.

Property

• Goal to build 1.2 million new homes by 2030
• AUD 89 million over three years for 20,000 new fee-free training places in construction industry courses
• AUD 423 million over five years from 2024–25 as additional funding to support the provision of social housing and homelessness services by states and territories
• AUD 1 billion in 2024–25 for states and territories to build enabling infrastructure for new housing, with a focus on social housing.

The government’s investment in the Future Made in Australia strategy with its focus on solar power, batteries and hydrogen will be of benefit to the industrial property sector and particularly the specialist industrial sector, says Westpac Institutional Bank analyst Frank Allen.

Ironically, industrial property with very low vacancy and soaring rents is the commercial property sector least struggling under the weight of high interest rates and a slower economy.

Allen says the rest of the commercial property sector should benefit if the Government’s forecasts of inflation moving to within the RBA target range within the next year eventuate, as it should provide a level of confidence that interest rates will settle and possibly move lower over time. This should give purchasers the confidence to step back into the commercial property market and activity should pick up.

The government increased its ambitions for new homes to 1.2 million mid last year from 1 million. But Allen says while the plan to increase the construction workforce are positive, it will take a few years for the new workers the government is funding to complete their training. Additionally, construction costs remain very high which is challenging the feasibility of many medium to high rise unit projects.

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