Seven budget items every investor should be aware of

Behind the headlines there is a range of key changes and assumptions useful to any active investor

Now that the smoke has cleared, investors can see at a glance what happened in this week’s budget: Small business got a tax break, older Australians were blocked from getting pensions and young families with kids in childcare got assistance.

Of course every budget has to be put in a wider context of political reality and the immediate ­history of the Treasury regime in question. In this case, we had a Treasurer keen to regain public confidence (and to some extent Treasurer Joe Hockey has achieved this). We also had a budget exercise which may yet again may be hostage to the Senate.

Nevertheless, for the active investor I see at least seven key take­aways from budget 2015. In some instances these takeaways are to do with what the budget implies rather than explicitly ­details, in other measures we have clearly defined changes — either way it’s worth knowing each of these outcomes.

1. Cash will remain a hopeless investment

Even if Treasury is substantially out in its estimations, the forecasts for key numbers such as GDP growth (near 3 per cent) or inflation (2.5 per cent) are so low we are going to have to accept that the sort of rates you get on cash right now are going to stay ... and they are, as Reserve Bank Bank governor Glenn Stevens has told us: “among the lowest in human history”.

In terms of the “hunt for yield” shares and property (in every form) and selected fixed-income investments such as mortgage bonds will have to be examined as an alternative to rock bottom cash rates.

2. Spending money on your home makes tax sense

It’s all wrong from a textbook perspective: our home should not be treated as an investment, but when we know it’s exempt from capital gains tax and when we have just been told it is exempt from pension access cutbacks ... it’s silly to ignore reality.

To say pensions are safe under the Abbott regime is playing with words. Pensions might be safe but it is getting considerably harder to qualify for them. On other hand, there is no limit to the ­generosity afforded to the family home — for now the perks of sinking money into your house are limitless, which will drive up house prices further without doubt.

3. Government-provided income streams will dry up

The move to cut back pension access is the single biggest saving in the budget — it will save $2.4 billion over the forward estimates and it will hit more than 300,000 people. For example the cut-off in investible assets for part paid ­pensions (for couples) is now $825,000, down from $1.15 million.

Income is the hardest thing to get in an era of low rates. It’s also one of the most expensive items for a government to provide. Don’t be surprised if accessing pensions gets even harder in the years ahead.

4. “Older and wealthier Australians will foot the bill”

Whether you agree or not, the sense that a lucky generation got to party while everyone else struggled is now baked into the political narrative and it is acceptable to take money from older people (pension cutbacks) and redistribute it to younger people (couples with kids in childcare).

The political reality that Social Services Minister Scott Morrison is confident he can get the pension access cutbacks through the Senate is proof that robbing older Australians to subsidise younger ones is now feasible. What will happen next? ... Tighter access rules towards getting a Commonwealth Seniors Health Card looks like a good bet once this latest package of changes goes through.

5. Retail stocks will get a sugar hit

The one big fat handout in the budget was to small business. A tax cut from 30 per cent to 28.5 per cent and instant asset write offs will give this sector a boost. But we are talking about a very slim strata of business activity — companies with a turnover of less than $2m. As my colleague Richard Hemming explains in Under The Radar today, it means there will be a burst of tax-driven purchases of fully imported business equipment. That’s good news for Harvey Norman and other retailers but it’s a sugar hit, no more no less. It might even be a time to take profits in retailers that have suddenly had their moment in the sun.

6. Iron ore prices could save Joe Hockey’s job

The Treasurer desperately needs something to work out better than Treasury predicts. Iron ore might be the hidden factor: As Eureka Report economist Adam Carr has noted iron ore is the source of the single biggest write down in budget 2015.

Crucially, Treasury modelling analysis suggests a $10 movement up or down on the price of iron ore adds or subtracts 0.8 per cent to GDP. Now here’s the rub, the “assumption” in this year’s budget is that the iron ore price is $US48.

Virtually every significant analyst has a price for iron ore higher than that — the banks have it around the $US55 mark. The price of iron ore right now has already moved substantially since the budget papers were signed off on April 30. Investors should note that in fact the iron ore price today is about $US61 — if it held there — or anywhere close to this number — it would give Hockey a boost to the budget bottom line he desperately seeks.

7. The wedding planner’s mystery number

One of the last great rorts in the country has been the meal and entertainment expenses exemption for employees at “public benevolent institutions and health promotion charities”. This exemption was loosely ­defined and uncapped. In other words, doctors and top hospital officials were putting through not just dinner on Saturday night but regularly major expenses: believe it or not, it was feasible to put wedding function expenses through the system!

A new measure puts a $5000 cap on this whole business and sternly warns: “All use of meal ­entertainment benefits will become reportable”. In other words, Dr Jekyll you won’t be putting your daughter’s wedding through the hospital expenses next year! Maybe hotel stocks might be in for a dip?

So it turns out among the 200 listed measures in the budget ­papers there are actually quite a few lines of inquiry well worth understanding. You just need to look past the spin.

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