The one Federal Budget item affecting you in 2017

 

So who watched the live telecast of the 2017 Australian Federal Budget in early May?

It seems like most of Australia didn’t so it’s going to be pretty hard to know the one federal budget item affecting you come 1st July 2017. That said, I get it. It is entirely understandable given the everyday person would rather tune into Masterchef than watch a politician humorlessly deliver a bunch of numbers without proper context.

Floating dessert by Christy Tania on Masterchef Australia

Source : Christy’s floating dessert on Masterchef Australia

While I must confess that sometimes I find myself more interested the secrets behind Masterchef, like knowing exactly how Christy Tania floated her desert, rather than watch Federal Treasure Scott Morrison smile awkwardly into the camera, the 2017 Australian Federal Budget did have one important item that I think all Australians should know about.

Before we get onto that, just what exactly is the Budget all about?

The Australian Federal Budget 2017 that was announced on 9th May 2017

The Australian Federal Budget, as the name suggest, is the official estimation of the country’s expected revenues and expenses for the upcoming year as proposed by the ruling governing party. The release of the yearly Budget is usually scheduled in May, and it is a day when Corporates – big and small – sit up and take notice because policies introduced usually makes or breaks business plans for the upcoming 12 months.

In some cases, it can even lead companies to bankruptcy.

You might have seen on the news and know that Australia’s Budget is currently running at a deficit to the tune of $37.1 billion, meaning the country spends more than it is earning right now.

It doesn’t take a genius to know that a Budget in continuous deficit spells trouble for the economic future of all Australians as more debt piles up, and that only a strong positive Budget will allow for increases in government spending, which in turn creates jobs and increases wealth for all.

The one detail that financially affects the majority of Australians

The ruling Coalition party led by the Turnbull government is highly aware of the potentially crippling effects of a continuous Budget deficit, and are actively introducing measures to turn the country’s finances around.

In their first efforts at returning the 2017 Budget to a surplus, the Treasurer has sprung a massive surprise this year by introducing a $6.2 billion Levy for Australia’s 5 largest banks in ANZ, Commonwealth, Westpac, NAB and Macquarie.

Very simply, this Levy is a 6 basis points “tax” on the Bank’s liabilities (or funding) and is set to be rolled out over the next 4 years. Early calculations estimate that this Levy could potentially reduce each bank’s individual profits by $350m annually, and that has implications on all Australians.

So how and why does this one Federal Budget item affecting you cause financial stress?

You might not think it but trust me when I say that EVERY Australian is connected to the Banks in some way, shape or form. If you are a homeowner, it is likely that one of the banks hold a mortgage over your home. If you are employed and have contributed to superannuation, it is very likely that your superannuation fund are shareholders in the Banks given they make up a large chunk of the ASX by market capitalization.

As a mortgagee….

The one Federal Budget item affecting you is the potential increase in mortgage rates

The Levy affect homeowners because an attack on the Bank’s profits might mean increased banking costs for you and me. Like it or not, shareholders of the banks are number #1 on the list of “stakeholders to make happy”, and shareholders only care about earnings per share, or EPS, which are driven by Banks’ profits.

If you ever looked at the annual reports of Banks, you’d normally see that remuneration structures for high-ranking bank executives are tied to share price performance which are ultimately driven by shareholders. So indirectly, executives are incentivized to work for shareholders in protecting bank profits to ensure EPS are maximized where possible.

In maximizing EPS, one of the ways Banks could protect their profits is by introducing out-of-cycle mortgage rate rises independent of the Reserve bank of Australia. By getting a better Return on Equity (ROE), which by the way is the key metric used by investors to assess a Bank’s profits, shareholders are kept happy at the expense of mortgagees who have to bear the increased cost of loans.

That simply translates into higher interest costs for homeowners across the country.

As a shareholder….

The one Federal Budget item affecting you is the potential drop in share prices of affected banks

In simple accounting terms, the $6.2 billion Levy will be an expense that reduces the retained profits of the Banks. That would mean lower profits enjoyed by the Banks, lower EPS for investors and the threat of reduced dividend distributions, an income source that is relied on by many Australian investors.

With less retained profits, the Banks would consequently be starved of capital to invest in future business improvements, robbing the organization of growth initiatives that would have translated to future growth in EPS. As the old saying goes, to grow businesses one has to invest in it.

Another unwanted effect of reduced EPS going forward is the possibility of capital losses in decreasing share prices driven by investors who sell shares because they get spooked by the prospect of future lower returns. Indeed, the fear of the $6.2b Levy being legislated has decimated the share prices of the Banks with large falls observed after Budget night.

Share prices of affected banks after Budget 2017

Why are the banks being targeted?

To tell the truth, we might never know the real reason why the Banks get targeted.

Banker’s greed gouging helpless customers seem to be the defensive stance touted by the politicians every time a new regulatory impost is introduced. It has long been the belief that certain MPs hold a strong resentment for the billion dollar profits generated by our country’s highly successful banks, and this latest Levy is testament to that.

The very fact that the Banks are highly profitable organizations in the public eye make them very easy targets to exploit as they are assumed to be able to “take the financial hit”. There are also market rumours to suggest that this Levy is the Government’s way to charge for their guarantee on large deposits and wholesale funding of Australian ADIs.

Fortunately for the Banks, the Levy has yet to be officially passed through Parliament as it stands and they are still lobbying hard to have this Levy removed from consideration so who knows exactly what will transpire come 1st July 2017 when this new Levy is meant to come into effect.

Being financially vigilant

While the outcome is still anyone’s guess, it pays to be aware of how the Budget will affect you financially. In very general terms, one of the keys factors to building long term wealth is anticipating what financial markets will do in the short to medium term, and setting up your investments to take advantage of that movement.

Now that you know the financial implications of a possible Bank Levy, the ball is in your court as to how you alter your mortgage commitments and/or investments to adapt to the upcoming changes, and place yourself at an advantage again.

Good luck!

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