The 2022 Federal Budget

The Federal Budget held few surprises and was obviously designed to assist the current Government’s chances of re-election, hence various temporary tax reductions and small payments to various welfare recipients were announced. Treasurer Josh Frydenberg predicts unemployment will sink to 3.75% from the current level of 4%, the equal lowest in 48 years.

Some of the key announcements were:

  • There is no change to the personal income tax rates.
  • The fuel excise will be cut by 20 cents a litre for six months.
  • Minimum pension drawdown amounts have been maintained at percentages 50% below “normal“for another financial year.
  • There has also been a further extension to the Low to Middle Income Tax Offset (LMITO), with the maximum tax saving to those on incomes between $48,000 and $90,000.
  • Superannuation Guarantee to increase to 10.5% effective from 1 July 2022.
  • Cost of living payment: Eligible social security recipients resident in Australia will receive a one-off $250 payment in April 2022. Eligible payments include the Age Pension, Disability Support Pension, Carer Payment and Allowance, JobSeeker Payment (and equivalent DVA payments), as well as individuals holding a Pensioner Concession Card or Commonwealth Seniors Health Card. Like previous relief, the payments will not be means-tested and will be tax-free.
  • Lowering the Pharmaceutical Benefits Scheme (PBS) safety net: From 1 July 2022, the Government proposes the PBS safety net come into effect earlier, with 12 fewer scripts being required for concessional patients and two fewer scripts for general patients each calendar year before the safety net activates.

Ukraine and the “Axis of Autocracy”

I can’t forecast how the war in Ukraine will end but it has already thrown up multiple surprises and consequences, some of which are likely to be long lasting. Firstly, few expected the Russians to invade. Once they did, most expected they would have a relatively quick victory. Few predicted that the Western countries would quickly unite and impose significant and meaningful sanctions against Russia. The shortcomings of tanks against modern anti-tank weapons have been highlighted. The economic consequences of Europe’s reliance upon Russian gas and oil have been shown that dependence to be folly. The list goes on.

The long-term consequences of this war will be substantial and have big implications even for geographically distant nations like Australia. In particular, the “axis of autocracy” between China and Russia has highlighted the possibility of further conflicts and that we need to substantially improve our defence capability as soon as possible. That will be expensive as our current defence preparedness is widely acknowledged to be weak. China has declined to criticise Russia’s actions, which is consistent with its February statement that the “friendship between the two states has no limit”.

The disruption to global supply chains due to Covid and now this war has not only added to global inflationary pressures but will hasten the process of deglobalization that had already commenced. Everyone is becoming more focused on reducing dependence on foreign suppliers, particularly when the goods are critical and the supplier is potentially unreliable. There will be more examples like the Federal Government’s recent announcement of establishing a Moderna facility in Melbourne to produce mRNA vaccines. One positive for Australia is that some of our exports, like LNG, wheat and barley, should be in more demand.

Bond Market Selloff

The past 30 years have seen interest rates fall substantially to historic lows but that has reversed over the last 20 months, particularly in recent months as inflation surged and Central Banks have signalled interest rate increases. This has resulted in falling bond prices (rising yields) and negative returns for most bond funds. The Bloomberg Barclays Global Aggregate Index rolling 12-month return is the lowest in history at around -7.3%. Bonds are generally defensive assets and often negatively correlated with the stock market – they do well when the stock market is falling – but recently this hasn’t been the case. Hopefully, the worst is over, but no one can be sure. Bonds are inherently less risky than stocks, so they remain relevant for all but the most aggressive investors.

The Case for Gold

I’m not normally a great advocate for gold because it pays no return, but in current circumstances, it is worth considering as a store of value in turbulent times. Market commentator, Jonathan Pain, makes a valid point that the action of the US to freeze Russian central bank assets may prompt some countries, such as China and Saudi Arabia. To reduce their substantial holding of US Government bonds in case they have their holding frozen in some future dispute. China holds over US$1 trillion (1,000 Billion) in US Government bonds and Saudi Arabia $119 Billion. Pain says:

“There is only one true global store of value that has stood the test of ancient and modern history…5,000 years of turbulence, revolution, hyperinflation, world wars and changing currency regimes. And it’s not bitcoin or any of the other 12,000, and counting, cryptocurrencies. My bet is that some of America’s autocratic creditors will head for the exit in the years ahead. Between you and me, it will not be years. Yes, and they will follow Putin’s lead and sell U.S Treasury securities and buy gold”.

Andrew’s Pending Retirement

I expect to be retiring and handing over to a new adviser in the next two months and as soon as the process to implement that is confirmed I will update you. In the meantime, don’t hesitate to contact me, as usual, should you have any issues you wish to discuss.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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