Budget 2012 – Pass or Fail?

May 9, 2012

Australian Economy

When you run a big business like Australia you need to take  account of many all your stakeholders and you make choices. That’s what Labour has done last night – they have favoured their political constituency at home over the wealthier. They have played to the international audience by delivering a surplus HEADLINE – this keeps us out of the mess that is engulfing Europe and concerns about deficits, fiscal positions and fiscal space.

But what have they really done and how will it impact our economy.

Certainly it’s easy to knock Wayne Swan and Labour for last night’s Budget given the apparent chicanery used to achieve the wafer thin surplus of $1.5 bln for the next Financial year.

I think the best summary along these lines that I have read comes from Adele Ferguson in the Fairfax press,

The promised 2012-13 federal budget surplus of $1.5 billion was achieved largely  by targeting companies and the so-called one per centers, sprinkling it with a  good dose of accounting trickery (shifting some expenditure between years), and  using some overly optimistic economic forecasts and super-sized projections for  carbon pricing.

Yep, by moving payments around – pulling them forward, by cutting large swathes of spending, dropping a promise or two and targeting the so-called rich and their perks but particularly in expecting Treasury’s growth projections to be right for a change the Government will get to its surplus figure.

As pointed out to me last night by Twitter mate @AusMMT if Treasury’s panglossian forecasts are out by just 1% (which I’m betting they might be) then the budget swings from surplus to a deficit of $7.1 bln – you can see the relevant budget paper here.

But I guess the key thing to say is that this is always the case – the budget is always hostage to the expectations that back it up. It’s not right to say garbage in garbage out but in this world of heightened uncertainty it’s simply folly to predict a number for the surplus with any confidence.

But leaving aside the ebb and flow of where the money has come from and where it is going does that matter?

I would say both yes and no.

Whether you want to characterise this as an election budget I like the fact that there is a net flow of funds to the less wealthy households at a time when they are under the pump economically. Could this be stimulus Mark II that flows from Mining Boom Mark II and give a lift to the economy in the way that the first stimulus did a few years ago? I hope so because it could make a material difference to economic activity if it does.

And does it really matter if the company tax rate stays at 30% instead of moving down to 29% – I doubt it makes much difference in the long run and for small business there are offsets anyway.

So overall in a world of uncertainty I think this budget has achieved a balance against the restrictions that the government’s financial situation and the global economic outlook and enduring malaise. There are many risks that the outcome is substantially worse and my guess is that we’ll end up with a budget deficit of $10 bln or more when we sum up the 2012/13 financial year in 14 months time.

The irony, or unintended consequence, of this budget for me though is that Treasurer Swan essentially implored the RBA to keep cutting in last night’s speech. Clearly the Government has made the political decision that in handing money to their constituency while in aggregate believing their drive for surplus will necessitate more rate cuts for home owners the combination will be politically positive for them.

But the pull forward of School payments and Carbon offset transfers to households runs the risk of being a cash splash that distorts the economy in a positive manner as did the family transfers under Prime minister Rudd. If that’s the case then the RBA may just have to wait a little longer to get a true picture of economic activity.

As a behavioural economics guy on this positive risk alone I give the Budget a PASS

Ironic isn’t it!

Have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

 

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4 Comments on “Budget 2012 – Pass or Fail?”

  1. lukechircop Says:

    A very balanced take on the budget. If a one per cent inaccuracy could lead to a $7bn deficit then couldn’t it also lead to a $10bn surplus? I wrote an article discussing the impact of reducing foreign aid in the budget if your interested: http://theblogicalvoice.com/2012/05/10/cut-to-international-aid-wont-be-swans-song/

    Reply

    • Gregory McKenna Says:

      Yep agreed – a positive surprise could definitely come, particularly if the households that get the cash spend it. I look forward to reading your piece – thanks for linking

      Reply

  2. lukechircop Says:

    Very true. And I doubt many households will just chuck the money in the bank. If you believe Mr Abbott the money will be foolishly gambles away. He doesn’t give Australians much credit clearly..

    Reply

Trackbacks/Pingbacks

  1. Budget 2012 | Pearltrees - May 9, 2012

    […] Budget 2012 – Pass or Fail? | Lighthouse Securities Government’s reverse psychology Treasurer Wayne Swan’s message as he delivered the budget was that its initiatives were designed to share the benefits of the boom directly with families, rather than through business. Photo: Rob Homer THE big three expenditure items in the budget – welfare, health and education – will return to the cash-splash levels of the global financial crisis as Wayne Swan takes a radical path back to surplus by combining deep cuts with new spending. The razor-and-handout approach is typified by a $966 million cut to defence spending in 2012-13, a new education handout to families worth $516m in the deficit year of 2011-12 and $426m in the surplus year of 2012-13. […]

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