Federal Budget Commentary

Our previous post includes a line-by-line summary of the Federal Budget (‘Federal Budget Wrap’). This post includes an excellent, easy to understand commentary (a verdict of sorts) from AMP’s Dr Shane Oliver.

Read here

Rick Maggi CFP, Westmount Financial, Financial Advisor (Perth)

Global Markets and the upcoming Federal Budget...

Global Markets: Hope reigns supreme...
 

US stocks rose further last week – the sixth weekly gain in a row – with ongoing hopes for a US-Iran peace deal despite continuing skirmishes in the Strait of Hormuz. One sign of optimism was the decline in oil prices. A stronger than expected US payrolls report on Friday also boosted stocks. 

Yet another week in the lingering Iran war and hope springs eternal. The global economy is facing a race against time – settle the Iran war and re-open the Strait before the lagged impact of the lack of new supply jacks up prices. So far at least, inventory run-down, some demand restricting measures across Asia and persistent hopes for a peace deal has limited lift in near-term oil price futures – but the clock is still ticking.

Both sides are exchanging peace proposals – at the same time as they’re firing on each other’s ships! But there seems enough wiggle room on both sides that hopefully a deal can be done soon – though the outcome is unlikely to be much better for the US than the Obama-era deal that Trump tore up in 2018. 

The current environment reminds me of the COVID-crisis – after an initial sell-off due to lockdowns, markets kept rallying despite abysmal economic data, due to the ongoing hope of a vaccine and economic re-opening. Markets can endure near-term sticks it seems if there remains an attractive carrot ahead of them.

But for now, markets remain in limbo – waiting on a peace deal. As the consequences of no deal seem catastrophic for both sides, it’s hard to imagine they can’t/won’t agree. Yet the week begins with news that Iran is refusing US demands to dismantle its nuclear facilities and suspend uranium enrichment for 20 years.

Global markets rebound...
Global equity markets have now staged a remarkable 6-week rebound on peace talk hopes. Overall global stocks and the S&P 500 are now trading comfortably above the levels prevailing just before the Iran war began. But it’s not just peace-talk hopes, but a renewed infatuation with the AI trade – especially hardware companies. 

Accordingly, the US, Japan and emerging markets continue to do best in the rebound so far, whereas Europe, Australia and small caps have not. The Nasdaq 100 has shot the lights out. Korea is also soaring, thanks to the market’s love of hardware companies such as Samsung benefiting from the AI boom – as, unlike software companies, they’re at less apparent risk from disruption.  

Australia: RBA and the Budget...
Local stocks underperformed global stocks again last week, with the RBA delivering on its threat to raise interest rates for the third time in a row. Concerns around capital gains tax increases in this week’s Federal Budget did not help.

It’s been a sorry tale for local stocks in recent weeks – which have failed to benefit all that much from the global market rebound. A low technology exposure, along with RBA and Federal Budget concerns, have been major drags.

If there was any solace in last week’s RBA rate hike news, it was that the Bank might be kind enough to pause at the next meeting in June – just to assess the impact of its work to date. 

My hope is that by the time the August meeting comes around, the Iran war will have ended and oil prices will have retreated further, lessening the pressure on the RBA to hike further. Potential disruption in the property market following this week’s Federal Budget might also give the RBA reason to hold off. We'll see.

Tax grab or boost for intergenerational equity?
Rumours suggest a fairly aggressive attack on negative gearing and capital gains. This will apply to all assets it seems – such as property and shares – with an exemption only for new properties. 

Modelling suggests that the shift to inflation-indexing of capital gains – rather than the 50% discount – will increase the effective capital gains tax the longer you hold an investment and the higher the return it attracts.

As an example, an investment returning 7% in capital gains each year held for 10 years will attract a 15% CGT under the current system, but 21.3% under inflation-indexing (assuming inflation of 2.5% p.a. and a marginal income tax rate of 30%).

• If the annual return was 10%, the CGT under the current system would remain 15% but lift to 24.7% under inflation-indexing.

• If the 7% returning investment is held for 30 years, the CGT under inflation-indexing rises to 25%, though stays at 15% under the current system. 

Boomer investors will be hurt, but so will younger investors – especially as they have longer investment timeframes and tend to hold higher-growth investments.   

As for the property market, the expected tilt favouring new property will only succeed in driving up land values and developer profits (due to supply constraints, the more favourable tax benefits will be quickly capitalised into prices), while there’s also a risk of a leap in rents on existing properties as investors exit the market and demand higher compensation to offset the less favourable tax benefits.

Also getting media coverage is an effective doubling of the capital gains tax on entrepreneurial companies from 25% to a world-beating 50%!.

All up, the idea that these changes will boost ‘intergenerational equity’ seems a stretch – there may be several unintended consequences that actually make economic conditions even harder for the young (higher rents, high new property prices, reduced returns on longer-term investments and the hobbling of the start-up/entrepreneurial sector).

It’s true that current tax incentives favour gearing up into property especially – but a key problem is the high 47% top marginal tax rate which kicks in at a relatively low income by global standards and is considerably higher than the corporate tax rate. That just invites creative tax planning – the impetus for which won’t change after tomorrow. True tax reform would have involved effective tax-base broadening (as we’re likely to see tomorrow) along with a reduction in marginal income tax rates.

More to come.

Rick Maggi, CFP, Westmount Financial, Financial Advisor (Perth)

RBA raises cash rate to 4.1%...

The Reserve Bank of Australia (RBA) has announced a 0.25 percentage point increase to the official cash rate, lifting it to 4.1 per cent. While the move wasn't universally anticipated by market commentators, many economists had flagged the possibility in the wake of growing geopolitical tensions following the outbreak of conflict between the US, Israel, and Iran.

Leading up to the decision, markets were fairly divided — the ASX's RBA Rate Tracker had placed a 58 per cent chance on a rate rise and a 42 per cent chance of no change as of 16 March 2026. Ultimately, the RBA board voted five to four in favour of the increase, with four members preferring to hold the rate steady at 3.85 per cent.

In its statement, the RBA explained that a broad range of data has confirmed a build-up in inflationary pressures across the second half of 2025. The board acknowledged that some of this uptick reflects temporary factors, but noted that the labour market has tightened and capacity pressures are slightly higher than previously assessed.

"Developments in the Middle East remain highly uncertain," the RBA noted, adding that across a wide range of scenarios, the conflict could add to both global and domestic inflation. With inflation expected to remain above target for some time and risks tilting to the upside, the board determined a rate increase was the appropriate response.

A Closely Watched Decision

In the lead-up to the meeting, debate centred on whether the RBA would deliver a back-to-back hike — returning the cash rate to levels seen just over a year ago — or adopt a hawkish hold ahead of a potential May increase, as surging oil prices and renewed inflation risks complicated the picture.

Prominent voices weighed in on both sides. Betashares' David Bassanese and T. Rowe Price's Scott Solomon both anticipated an immediate March rise, while Ebury's Anthony Malouf suggested the board might prefer to wait for the late-April first-quarter CPI print before acting. All four major banks, however, had already shifted to a base case of back-to-back hikes in March and May.

What the Experts Are Saying

MLC Senior Economist Bob Cunneen had sounded the alarm ahead of the decision, warning that inflation was already running too hot. He pointed to the sharp rise in petrol prices following the outbreak of conflict in the Middle East as a key catalyst, noting that national prices had climbed from around $1.71 per litre in February to above $2.20. In his view, this alone could push Australia's annual inflation — which sat at 3.8 per cent to January — closer to 5 per cent in the months ahead.

CreditorWatch Chief Economist Ivan Colhoun echoed this sentiment, describing the rate rise as justified given the slow return of inflation to target, as well as recent data on inflation, unemployment, and growth. He acknowledged the decision brings unwelcome news for households and businesses, but stressed that allowing inflation to run above target for an extended period would ultimately be more damaging.

"While this is news that is unwelcome for both households and businesses, neither is the situation where inflation is allowed to run above-target for a further extended period," Colhoun said.

Rick Maggi | Westmount Financial | Financial Advisor | Perth