Budget 2022: Analysis sector by sector

One-off payments to ease Australians’ cost-of-living pressures were this year’s Budget scene-stealers, but who will be the longer-term beneficiaries? Westpac Institutional Bank analysts reveal its impact by sector.

12 April, 2022
 

By Christopher Niesche
 

The AUD 8.6 billion in one-off payments, tax rebates and cuts to fuel excise that the Federal Government introduced to ease cost-of-living pressures are the headline measures in this year’s budget.
 

However, while these initiatives will support retailers and help ensure mortgage holders can continue to meet their loan repayments, they are only temporary.
 

More significant for many industries is the ongoing recovery from the COVID-19 pandemic and lockdowns as consumers get out more, net migration once again swings to positive and more international tourists and students return to Australia.
 

The 2021 Budget forecasts a strong turnaround in migration and students and visitor numbers in the coming years, which will support the housing, education, retail and tourism sectors.
 

Other significant features include half a trillion dollars in defence spending to 2030, including AUD 9.9 billion on cyber security over the next decade, and a splurge on regional infrastructure which will help the mining sector cater to a low-emissions world and advance Australia towards becoming a major hydrogen exporter.
 

In this report, Westpac Institutional Bank analysts consider the likely impact of the measures in Federal Budget 2022 sector by sector.
 

Agriculture
 

• AUD 7.1 billion in infrastructure spending to support regional areas, including infrastructure aimed at strengthening export markets and supporting the growth of existing and emerging industries, including agriculture
• AUD 2 billion Regional Accelerator Program to create jobs
• AUD 267 million package towards reducing the cost and time of exporting and making it easier for agriculture businesses to compete internationally
• Stronger biosecurity measures for Australia’s northern borders
• Cut in the tax on income from Australian Carbon Credit Units and biosecurity certifications by re-classifying the profits from off-farm income to on-farm income, which is expected to save primary producers AUD 100m over the next four years.
   

The agri sector was a big winner in this year’s Budget, says Westpac Institutional Bank agriculture analyst Sarah Cavallo.
 

The funding package is aimed at helping agriculture get closer to its target of being an AUD 100 billion industry by 2030 and is preparing farmers for future challenges with an AUD 80 million resilience program and AUD 32 million to trial programs to increase biodiversity on farms.
 

While the spending on regional infrastructure isn’t specifically aimed at the agriculture sector, road and port projects in Western Australia and the Northern Territory will help farmers get their goods to market more quickly.
 

In other measures, the 2,100-gigalitre Hells Gates Dam Irrigation Scheme project in North Queensland has received AUD 5.4 billion of committed Federal Government funding that will help to underpin water security in some of the driest parts of Northern Australia, opening up 60,000 hectares of irrigation across the region, subject to Queensland state government approval and environmental approvals.
 

Likewise, the jobs program is aimed broadly at the regions, but it will also help to grow the agricultural workforce.
 

IT and Digital
 

• 120 per cent tax deductions for small and medium business spending on digital technologies like cloud computing, eInvoicing, cyber security and web design
• AUD 1.3 billion over six years to improve regional telecommunications, including through providing greater mobile coverage
• AUD 1 billion on Digital Economy Strategy
• Investment in cyber security
   

The government’s AUD 9.9 billion cyber security spend is a major headline grabber and will have flow-on effects to businesses specialising in high value data collection and processing, artificial intelligence and cyber security as they look to benefit from resulting government contracts, says Westpac Institutional Bank IT industry analyst Jonathan Trewavas.
 

Helping small and medium businesses to adopt digital technology continues to be a key priority for government, with the 120 per cent tax deductions for SME’s spend on digital technologies like cloud computing, eInvoicing, cyber security and web design.
 

Much of the AUD 1 billion for the Digital Economy Strategy will be spent on the government’s own digital assets, such as MyGov and My Health Record, but it will also create work for contractors, Trewavas says.
 

He notes, however, that the sector continues to call for greater investment in IT and digital skills and development.
 

Telcos
 

The AUD 1.3 billion to improve regional telecommunications connectivity includes AUD 480 million to enhance the NBN Co’s regional fixed wireless and satellite services, with an additional AUD 270 million to be contributed by the NBN.
 

“That will improve the quality of service, which regional communities really need,” says Westpac Institutional Bank telco analyst Jien Goh.
 

A further AUD 800 million for the Connecting Regional Australia initiative will extend coverage to mobile black spots. With the largest share of the mobile telephony market, Telstra is expected to be a major participant, says Goh.
 

Defence
 

• Half a trillion dollars in defence spending by 2030 overall, including
• AUD 38 billion to increase the defence workforce by 18,500 personnel by 2040
• AUD 10 billion new submarine base in East Coast Australia
• AUD 9.9 billion investment over the next decade in new national cyber and intelligence capabilities
• AUD 4.3 billion for Australia’s first large-vessel dry berth in Western Australia
   

The government’s massive spending on defence will benefit the defence industry sector and cyber security companies in particular, predicts Westpac Institutional Bank defence industry analyst Denise Cheah.
 

Additionally, she says there is more spending to come because the government has yet to detail the cost of the eight nuclear-powered submarines it is building through AUKUS, the trilateral security partnership between Australia, the United States and the United Kingdom signed last September. The submarines will be built in Adelaide.
 

Infrastructure
 

• AUD 17.9 billion in new infrastructure spending, taking the total Federal Government infrastructure pipeline to about AUD 120 billion
• Queensland is the main beneficiary with AUD 4.4 billion in new spending; New South Wales with AUD 3.6 billion and AUD 3.5 billion for Victoria
   

Although slightly higher, the infrastructure spending plan outlined in this year’s Budget is broadly consistent with last year, says Westpac Institutional Bank infrastructure sector analyst Deshan de Silva. The government hasn’t highlighted any landmark projects – instead it’s spreading the spending across many projects, with an emphasis on road and rail.
 

The AUD 3.1 billion allocated to the Melbourne Intermodal Terminal Package aims to shift freight from road to rail and once completed will remove about 550 trucks from the road each day.
 

Queensland will benefit from upgrades to the Brisbane to Sunshine Coast and Brisbane to the Gold Coast rail links, which will support population growth, with an additional 1.2 million people forecast to be living in those regions by 2036.
 

As with previous years, the government is relying on private sector equity investment to help realise these projects, particularly through public-private partnerships or as operators of completed projects, de Silva says.
 

Major engineering, procurement and construction contractors will continue to benefit from the increased infrastructure spend.
 

Financial Institutions and Non-Bank Financial Institutions
 

• AUD 250 one-off cost-of-living payment to pensioners, carers, veterans and jobseekers
• AUD 420 temporary increase to low-and-middle income earner tax offset
• Temporary cut in fuel excise to 22c a litre
• Expansion of the Home Guarantee Scheme to 50,000 places a year
• AUD 150 million a year for two years to improve post-disaster resilience in NSW and Queensland
   

The AUD 8.6 billion in payments, tax rebates and cuts to fuel excise the government is introducing to help cost-of-living pressures will support banks and non-bank lenders by helping consumers and businesses make loan repayments in an environment of elevated costs, predicts Westpac Institutional Bank financial institutions sector analyst Gizem Yalim.
 

Households have comparatively high savings, which should also help support loan repayments.
 

“On the other hand, expected interest rate rises can put pressure on these borrowers, which may impact the asset quality of banks,” she says.
 

Expanding the Home Guarantee Scheme to 50,000 places – which allows low income-earners and single parents to buy a home with as little as a 2 per cent deposit – will likely increase home lending somewhat.
 

Australia’s net and gross debt profile is expected to be lower than previously estimated, reflecting strong and sustained economic recovery, and net debt is now forecast to peak at about 33 per cent of GDP in fiscal 2024/25. As such, it is unlikely to present a current risk to Australia’s sovereign credit rating.
 

Insurers will welcome the AUD 150 million a year for two years to improve post-disaster resilience in New South Wales and Queensland, which will assist with events such as floods and soften the impact of disasters on the general insurance sector, says Westpac Institutional Bank non-bank financial institutions sector analyst Stanny Sidana. The government will draw down on the Emergency Response Fund to inject the additional funds.
 

The Home Guarantee Scheme allows some homebuyers to take out a low-deposit home loan without needing to take out mortgage insurance, which could result in a reduced need for these insurance policies and thus a decline in revenue for mortgage insurers, she says.
 

Retailing and Groceries
 

• One-off tax break for up to 10 million individuals, or about 75 per cent of the working population, building on the estimated AUD 40 billion tax relief since the pandemic started, which will benefit essential spending on goods and services
• Net migration is forecast to return to pre-COVID levels, further supporting industry growth
   

With this year’s Budget, a key focus is on the cost of living. Ongoing global supply chain disruptions, combined with heightened geo-political tension coming out of Europe have continued to put pressure on inflation, and the groceries sector is not immune as consumers often bear the cost.
 

Some of the AUD 8.6 billion in cost-of-living payments, including the one-off cost-of-living tax offset will be effective from July 1 this year, and up to 10 million individuals will see AUD 420 to AUD 1,500 of tax relief, or double the amount for a dual-household.
 

In addition, the one-off cost-of-living payment for six million people – mostly pensioners and welfare recipients – at a total cost of AUD 1.5 billion will help to further alleviate the higher cost of goods and services, according to Westpac Institutional Bank grocery retailing sector analyst Sunny Yen.
 

In the longer-term, a strong increase in net migration over the next three years with the Federal Budget forecasting 235,000 of net immigration by 2025 or 1.2–1.3 per cent of population growth will also underpin demand for groceries.
 

The broader retail sector will likewise benefit from the cost-of-living measures and the normalisation of trading conditions in the wake of COVID-19 lockdowns. This will flow through to discretionary retailers, particularly as consumers seize the opportunity to return to shopping and spending in person, says Westpac Institutional Bank retail sector analyst Joel Yap.
 

“With this sort of sugar hit, we should see a continued increase in discretionary spend compared to last year,” he says.
 

The Budget forecasts household consumption to rise by 5.75 per cent in 2022-23 after a solid 3.5 per cent rise over the past year. Westpac’s Card Tracker for March showed another solid month for retail sales, with nominal sales tracking to be up 3 per cent for the first quarter of 2022.
 

However, as the cost-of-living measures are only temporary and interest rates are likely to rise, the risk for retailers could be that consumers choose to save rather than spend the Budget’s cash splash, Yap concludes.
 

Property
 

• AUD 2.8 billion to support apprenticeships
• Doubling of the Home Guarantee Scheme to 50,000 places a year
   

Westpac Institutional Bank property sector analyst Frank Allen says Australia could possibly suffer a shortage of residential property in a couple of years’ time as net positive migration resumes in the wake of border closures and new supply slows following falling dwelling approvals since March last year, particularly for medium to high rise dwellings.
 

The capital city supply squeeze is likely to continue despite the doubling of the Home Guarantee Scheme to help low-income earners enter the property market to 50,000 places a year and encouragement for people to move to the regions with better rail links.
 

“We’re moving into a potential undersupply of residential property in about two years’ time, particularly with respect to units,” Allen says.
 

Vacancy rates have dropped to 2.1 per cent in Sydney and 2.8 per cent in Melbourne with other capital cities sitting on about 1 per cent or lower.
 

On the positive side, the increased spending on apprenticeships will go some way to alleviating the labour shortage in the construction sector, Allen says.
 

While there is nothing specific for the commercial property sector in the Budget, the ongoing economic strength revealed in Budget forecasts will support income streams for investors and should ensure continued activity in that area.
 

Health Care
 

• Total of AUD 132 billion set aside for health care, up from AUD 121 billion last year
• AUD 31.4 billion in commitments to Medicare over the next four years, up AUD 7.3 billion
• AUD 2.4 billion in new medicines added to the Pharmaceutical Benefits Scheme
• Reduction in Safety Net spending thresholds for eligibility for discount medicines
• Imaging benefits added to list of prescribed Medicare spending
• AUD 4.2 billion in pandemic response
   

While the increased access to medicines funded by the Budget is undoubtably good news for consumers, it will place pressure on pharmaceutical companies and pharmacy margins, says Westpac Institutional Bank health sector analyst Julian Cikes.
 

The ongoing pandemic response spending includes AUD 1 billion for vaccines and AUD 2.6 billion for personal protective equipment (PPE), which will flow through to medical wholesalers and wholesalers of PPE. The remainder of the pandemic funding is for COVID tests, which will help support diagnostic companies.
 

Aged Care
 

• AUD 345 million to embed pharmacy services in residential aged care facilities
• AUD 468 million to continue implementing recommendations from the Aged Care Royal Commission
• 15,000 subsidised training places for aged care workforce
   

This year’s aged care spending package is an extension of the AUD 17.7 billion response to the Aged Care Royal Commission announced last year, says Westpac Institutional Bank aged care industry analyst Angus Caldicott-Chan.
 

The money put aside to continue implementing recommendations from the Aged Care Royal Commission includes cash to support the rolling out of the new funding model in October this year. This will be a key event for the sector, but there is currently very little detail known about the model. “That's a level of uncertainty for the industry,” Caldicott-Chan says.
 

The aged care sector is reliant on immigration for its workforce, and closed borders have exacerbated staffing shortages and the government is looking to assist this through the new training subsidies.
 

Higher Education
 

• AUD 2.2 billion over five years to support research into clean energy, healthcare and defence technology
• Excluding research, higher education funding to fall by 5.4 per cent
   

Higher education funding will fall compared to last year, when the sector benefitted from the JobReady COVID-19 support package.
 

On the positive side for the sector, the government said it would work in partnership with universities to provide training to support the massive defence spend.
 

“You've got jobs in AI, cyber engineering, data science, very highly skilled career pathways, which the university sector will be looking to support,” explains Westpac Institutional Bank higher education industry analyst Angus Caldicott-Chan.
 

“The Budget didn’t address the issue of returning international students and there are concerns that Australia is lagging other competing destinations such as the US, the UK and Canada because of the longer border closure,” says Caldicott-Chan.
 

Renewables and Energy
 

• AUD 1.3 billion for emissions reduction.
   

The spending on energy and emissions reduction is concerned with greening Australia’s supply chain, with initiatives to support low-emissions LNG, clean hydrogen and carbon capture and storage, says Westpac Institutional Bank electricity sector analyst Pranoy Modi.
 

There are also funds to value-add to iron ore exports to support a low-emission steel production offshore.
 

Modi says the funding is a continuation of the government’s existing approach to emissions reduction, which is technology over taxes, and will rely on significant private sector investment. “There is quite a lot of capital trying to find a home in renewable energy,” he says.
 

Resources
 

• AUD 1.5 billion to help develop the Pilbara as a hub for low emission industries.
• AUD 2 billon for the North Australia Infrastructure Facility to help finance infrastructure projects
   

The AUD 7.1 billion of regional infrastructure spending also includes AUD 750 million for the coal mining Hunter Valley region in New South Wales. Westpac Institutional Bank resources industry analyst Anthony Hutton believes the government wants to leverage off the Hunter’s existing transport, mining and water infrastructure to transform it into an internationally competitive hydrogen export hub.
 

In a similar vein, the government is looking to build off the existing infrastructure and geographical advantages of Western Australia’s Pilbara region to develop a major hub for low-emissions industries, with initiatives including upgrading ports to facilitate renewable energy exports and upgrading the Pilbara’s electricity grid infrastructure, Hutton says.
 

The regional infrastructure spending also includes an additional AUD 2 billon for the Northern Australia Infrastructure Facility, where the government provides financing to help infrastructure projects get underway, including mining projects.
 

“It feels like the government is now taking tangible steps to help the transition of some key mining regions and improve their resilience,” Hutton says.
 

A further AUD 200 million has been committed for the Critical Minerals Accelerator Initiative, which will assist the planning and pilot processes of strategically significant critical mineral projects.  This is expected to stimulate the pipeline of lithium, cobalt and rare earth projects which may be eligible for funding under the AUD 2 billion Critical Minerals Facility which was established in the 2021 budget.
 

The Budget assumes the current high prices for metallurgical and thermal coal and iron ore will all drop back to their long-run averages over the next six months. However, Westpac Economics is forecasting prices to remain strong to 2025, which would provide a significant boost to the Budget balance.
 

Westpac Institutional Bank Energy industry analyst Grant Jepson believes the 22 cent-a-litre cut to fuel excise will mean more discretionary trips for motorists and the resulting higher demand will benefit downstream fuel distributors who market petrol and diesel.
 

Tourism
 

• AUD 146.5 million for tourism, most announced prior to the delivery of the Budget
• Includes AUD 60 million over two years for marketing to draw international tourists and backpackers to Australia and AUD 75.6 million to extend the COVID-19 Consumer Travel Support Program for travel agents (third and final round)
• 30 per cent increase in cap for working holiday makers for 2022 and 2023
   

The tourism package was mostly announced prior to the Budget, although the spending continues into the next few years and contributes to the government’s THRIVE 2030 Strategy, says Westpac Institutional Bank tourism analyst Denise Cheah.
 

A key question mark is the extent to which international visitor arrivals will recover following Australia’s extended border closures and the closure of China’s international borders due to the ongoing COVID-19 pandemic there.
 

“By 2022–23 a continued recovery in the number of foreign tourist and international student arrivals is expected to see a strong turnaround,” the Budget papers state.
 

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