Josh Frydenberg will jettison the key plank of the federal government’s fiscal strategy by putting economic stimulus ahead of a return to surplus, which could be up to a decade away.
In a speech to the Australian Chamber of Commerce and Industry on Thursday, the Treasurer will reveal the “budget repair” strategy has to be delayed indefinitely and replaced with continued targeted economic spending.
However, the second iron law written into the fiscal strategy in 2014-15 — to cap taxes as a percentage of GDP to under 23.9 per cent — will be retained.
This will be helped by the bringing forward of the next round of personal income tax cuts, dealing with bracket creep, to be announced in the federal budget on October 6.
The budget had been effectively brought back to balance before the pandemic struck, with a return to surplus on track to be delivered by 2019-2020, erasing the deficit legacy of Labor governments.
In response, the fiscal strategy — a key statement of the budget, signalling the government’s fiscal roadmap — will place economic growth as the key priority ahead of restoring the fiscal position, which will be addressed when the recovery is “assured”.
“The first phase will see continued temporary, proportionate and targeted support and will remain in place until the recovery is assured,” a government source said.
“The second phase will focus on driving growth in order to rebuild our fiscal buffers and prepare for the next economic shock. The strategy will continue to focus on keeping taxes low through retaining the existing cap on tax as a proportion of the economy.”
Mr Frydenberg will warn there is a “long and hard road ahead” to restore the budget to an even keel.
The Morrison government is preparing a big-spending budget of historic proportions, focused on boosting “aggregate demand”. Treasury’s mid-year economic and fiscal update in July forecast the deficit would hit $184.5bn in the 2020-21 financial year.
Further tax incentives aimed at spurring business investment are also expected to be announced.
The budget document must include a fiscal strategy under the Charter of Budget Honesty Act 1998.
In the December 2019 mid-year economic and fiscal outlook for 2019-20, this was “to achieve budget surpluses, on average, over the course of the economic cycle”.
That strategy was underpinned by the objective of “building sustainable budget surpluses of at least 1 per cent of GDP, when economic circumstances permit, to build resilience and support fiscal flexibility”.
The MYEFO also said another element of this strategy was “strengthening the government’s balance sheet by reducing government borrowing as a share of the economy over time”.
In August, the Parliamentary Budget Office projected additional net debt by 2029-30 as a result of the pandemic could lie between 14 and 24 per cent of GDP, versus the 1.8 per cent projected by Treasury before the COVID-19 recession.
Foreign investors will pay more for proposed commercial takeovers and agricultural land purchases to be screened by the federal regulator following the introduction of a new national security test.
The new fee structure, to cover the higher costs of administering the toughened checks, will lift the cost of reviewing a $50m business or commercial land purchase to $13,200, up from $10,500.
Foreign buyers will face a maximum fee of $500,000 for commercial acquisitions worth more than $1.9bn, compared to the previous maximum of $107,100 for acquisitions over $1bn.
Foreign investors in agricultural land will be hit with a maximum $500,000 fee for acquisitions worth more than $76m, up from the previous maximum of $107,100. Fees to review foreign purchases of residential real estate will not change significantly, with a $13,200 charge per $1m of investment value, up from $11,800 per $1m.
Under the second tranche of the government’s Foreign Investment Review Board reforms, to be unveiled on Friday, those behind major foreign takeovers will pay a fee “that more closely reflects the costs of administering the framework”.
The fee hike comes just days after new figures revealed Chinese investment in Australia had plummeted by about 50 per cent in just 12 months — including in real estate, mining, manufacturing and agriculture — amid rising tensions between the countries.
Josh Frydenberg said the government’s foreign investment reforms would ensure the government could “respond to emerging risks and global developments” by properly screening offshore bids for key Australian assets.
“Importantly, while undertaking these reforms Australia still remains open for business and recognises the significant benefit foreign investment provides to our economy,” the Treasurer said.
“Australia continues to welcome foreign investment while also ensuring the framework remains non-discriminatory and applications will continue to be assessed on a case-by-case basis.”
The government says the new fees remain competitive with similar jurisdictions. Under new screening fees in the US, foreign investors are charged $435,000 for a $1bn acquisition. The same investment in Australia would cost $277,000 to review.
The government’s first tranche of its FIRB overhaul, announced in June, was the biggest shake-up of foreign acquisition and takeover laws in 45 years.
They will apply a new national security test to all foreign investment bids for sensitive assets, including telecommunications, energy and technology companies, down to small-scale defence suppliers and service providers. The Treasurer will also have “last-resort” powers to force assets to be sold or to impose conditions even after a sale is approved if national security is ruled to be at risk.
The Australian National University’s Chinese Investment in Australia project revealed last week that Chinese investors paid just $2.5bn for Australian assets in 2019, roughly half of the $4.8bn they spent in 2018.
Chinese investment in Australia peaked at almost $16bn in 2016 but has nosedived since as political differences have sharpened.
The tightened investment rules have been driven by the government’s assessment of greater national security risks arising from cyber threats and deteriorating strategic circumstances.
The Morrison government will consider a $25bn private sector-led energy infrastructure plan that could underwrite more than one million jobs, reduce energy costs and boost wages — while also fuelling economic growth by up to 2 per cent.
The proposal, which has been submitted to the government, includes major new private sector investment in upgrading energy infrastructure, new electricity transmission, hydro and electrification of industry to preserve energy-intensive manufacturing.
“The modelling of the national economic impacts of this plan shows that it contributes to a stronger economic recovery from the COVID-19 recession,” Mr Murphy told The Australian.
“It does this by adding an average of $25bn to private investment over the next three years as planned projects are developed.
“The demand stimulus from this development work means that next financial year (2021-22) there are an estimated 124,000 more jobs with the plan than without the plan.
In the medium to long term, the additional investment in low-carbon technologies in areas such as housing, electricity generation and transmission and manufacturing contributes to higher productivity,” Mr Murphy added.
The projects include a $4.5bn transcontinental energy transmission link and the $1.5bn Oven Mountain hydro scheme near Kempsey in NSW. The private sector is also ready to build a $2bn transmission line between Townsville and Mt Isa, providing cheap energy to the mining region.
The Australian has confirmed the government has been briefed on the modelling and the infrastructure plan, which is now under consideration as part of the pre-budget submission process.
Mr Murphy said the investment scale of the plan would result in a 1 per cent rise in real after-tax wages in 2022-23. He said wages would be 2 per cent higher by 2035-36 than they would be without the plan, and that improved productivity would add between 1 per cent and 1 per cent to GDP.
The list of projects includes the $1.7bn Victoria-NSW Interconnector — a highly developed transmission network that will link up cheap renewable energy into the grid and facilitate the flow of Snowy 2.0 power to Victoria.
The proponents claim the plan provides a roadmap for the revitalisation of manufacturing in the “industrial heartlands” of Central Queensland, the Hunter Valley, Whyalla and the Latrobe Valley by switching to low-carbon energy and renewables that would expand the production of steel, aluminium, hydrogen, ammonia and other metals.
The economic modelling shows that private investment was slowing before COVID-19 and was likely to fall further, which would affect the economic recovery and jobs and wages growth.
Private sector funding for the projects would also reduce the overall government debt burden relative to GDP.
“The plan’s approach of using government support to leverage private investment helps meet the third macroeconomic challenge of stabilising public debt relative to GDP, compared to alternative strategies relying more on public spending,” the report states.
“In all, the key to a stronger economic recovery with lower unemployment, higher living standards and contained government debt will be policies like this plan that stimulate higher productive private investment.”
The chair of BZE, Eytan Lenko, said: “Australia needs the best solutions to unlock productivity and growth, and BZE is bringing together leaders in investment, business and industry to get those ideas scoped and built.
“Only last week, the ABS reported 835,000 job losses since March. We need urgent action to work alongside governments to restore our economy. The Million Jobs Plan provides a framework to enable projects that are practical, bankable and create jobs.”
Mr Cannon-Brookes said: “No one thought 2020 would turn out the way it has. We now have a unique opportunity to seize this moment, to re-tool, re-skill and rebuild our battered economy to set us up for future generations.
“There is no doubt that The Million Jobs Plan is bold but, importantly, it’s also doable. This plan shows the way to a green (and gold!) economic recovery.”
The game gets ever harder for residential property investors as the banks continue to target every avenue they can for extra income.
Until relatively recently, banks treated home buyers and investors in the housing market in the same way, with the same interest rates. But these days property borrowers get slugged up to an extra 1 per cent interest on their mortgage debt.
Those higher rates on properties classified as “investment” are going to hit more than 100,000 property owners in the near future. Here’s how.
In the past, it did not seem important to advise the bank when you moved out of the family home and turned the property into an investment. In fact, most people are simply not aware that there is a clause in loan contracts requiring them to inform the bank whenever there is a change in usage of the property.
So if you bought a property to live in and move out and rent the property at a later stage, chances are the loan contract with your bank states that you need to inform them of this event.
As many borrowers are oblivious (or choose to be) in regard to this contractual obligation, there are thousands of loans outstanding that are classified as “owner-occupied” that in reality are undeclared “investment property” loans.
Keep in mind that APRA announced last year that from January 2022 unrented holiday homes and secondary dwellings will not fit the definition of an owner-occupied property as the current rules allow. In this category alone more than 100,000 mortgages will be affected and probably lead to an increase in interest rates
Sydney mortgage broker Elaine Lam says: “It is also relatively common for first-home buyers to use government grants and concessions and live in the property for six months and then move out and turn it into an investment property.
“I fear that many do not inform the bank as they are scared that their interest rate and loan terms will be adversely changed.”
The banks are becoming more vigilant because they are now required to hold a greater level of capital in reserve when they lend money to investors compared with owner-occupier borrowers.
This misclassification is of real concern to the banks and there are rumblings within the industry that the big four are undertaking large internal projects to identify and reclassify incorrectly noted home loans to investment loans.
Moreover, under the COVID-19 loan deferral scheme, more than 800,000 people have deferred $195bn in loans, of which 34 per cent of property loans are from investors. As the six-month repayment freeze starts to thaw, borrowers who are not in the position to resume repayments this month are able to request a further extension for four months.
But there is a catch: the extension is not automatically applied and there will be a manual process between borrower and bank to resume repayments.
As the cashflow crunch starts to bite in the coming months, Lam says: “Many borrowers will scramble and do whatever they have to in order to avoid selling property. As government stimulus is wound back and loan deferral provisions come to an end, I suspect many people may be forced to move out and rent the family home while renting a cheaper property to stay afloat and a short-term measure.”
Adding further concern is the Treasury estimate that unemployment will peak at 10 per cent. A recent survey by investment bank Morgan Stanley revealed that 55 per cent of loan holders surveyed are receiving some form of government income support with 15 per cent receiving unemployment benefits such as JobSeeker.
For borrowers who are enjoying home loan interest rates on loans over their investment properties the message is clear; be warned, your days are numbered. Further, it may be wise to inform the bank now rather than waiting for the bank to come knocking.