The asset-boom is just taking off, and our mate Butter-fingers just added several number of years to it’s run.
Who? How?
I’ll get to that, but this story has a beginning back in the mid-year economic forecast released at the end of last year.
Back then, Treasury and a self-satisfied treasurer were predicting a budget surplus of $1.1 billion. On monday a grim Prime Minister announced that actually, as it turns out, they’d misplaced $12 billion in tax revenues, and we better get ready to tighten our belts.
So now, it looks as though Wayne ‘Butter-fingers’ Swan is going to hand down a budget in two weeks that’s something in the order of $20 billion in the red. There’ll probably be some comforting guff about returning to surplus towards the end of the forecast horizon, but I doubt it will be worth the paper it’s printed on.
So a few points.
First of all, how did they get tax receipts so wrong? $12 billion doesn’t just slip through the cracks, or get lost in rounding errors. Of course there was the Mineral Resource Rent Tax, which despite all the political capital it cost, turned out to be more of a cash cat than a cash cow.
But that doesn’t get close to $12 billion.
The truth is that the revenue predictions were too optimistic, and relied on the Australian economy bouncing back much quicker than it actually has.
And now we’re staring down the barrel of a decade of deficits. Modelling from the Grattan Institute and Macroeconomics show that Australia now has structural deficits stretching out over the foreseeable future. They are structural in the sense that they reflect structural (rather than cyclical) features of the economy, including a large projected increase in Healthcare spending.
By the way, I thought the Macroeconomics modelling was a bit rich. They were sponsored by the Minerals Council, which means they were told exactly what to write.
And so after trashing the government for years, and after helping the mining industry get off scot free, barely chucking a penny into Australia’s hat, the Minerals Council is now out there publishing reports that are the playground equivalent of “ha ha, you’ve got no money…”
Oh, to be a mining magnate.
But getting back to the story, the other point to note is that while a $12 billion miss is a colossal stuff-up, the Coalition will be running hard with the line that the budget deficits are all to do with Labor’s irresponsible ‘spend it like it’s hot’ fiscal policy.
It’s a neat story, and you can expect the major papers to run with it, but it’s not true.
In the last year of the Howard government, government spending was 23.1 percent of GDP – the best that Howard and Costello managed.
In the last MYEFO update, Gillard and Swan were tracking around 23.8 percent of GDP – practically on the nose. It’s hardly partying like the parents aren’t home.
It’s also in the context of a GFC and a ‘wobbly-at-best’ global economic recovery. If this isn’t time to let government spending ride a little to support domestic demand, when is?
But this is all beyond the scope of sound-byte politics. At the end of the day, Abbott and Hockey have a new stick to beat Gillard and Swan about the head with. Let the Punch and Judy show begin.
But what does it all mean for investors like me and you?
Well, the Australian political fetish for budget surpluses isn’t going anywhere anytime soon. So what that means is that for the foreseeable future, fiscal policy is going to be ‘leaning against the wind’
Wherever it can, it’s going to be trying to claw back those budget deficits, scrimping on spending where it can, while keeping the net open to greater tax revenue wherever possible.
I think Australia has probably learnt the hard austerity lessons of Europe.
When weak economies go hard on cutting back on government spending, it pushes aggregate demand even lower, and deepens the crisis. The opposite of Keynesian economics.
It is bad policy in theory, and bad policy in practice. But Europe never put money away for a rainy day, and so they had no other choice.
Australia, however, is in a much better situation. A history of fiscal responsibility means that we can ride out a few years of budget deficits (even $20bn ones) without trashing our AAA credit rating – so long as there’s a credible and believable plan to bring the economy back into growth.
So I think we’ll only really notice this drive to surplus when things are on the up and up. The government will use any cyclical momentum in revenues that comes its way to slowly claw back the missing surplus.
But what this means is that if things start hotting up a little, the RBA can rely on government spending to take the edge off things.
Just as they start thinking about raising rates again (whenever that happens), they’ll find that the government is doing their job for them – cutting back on spending and bolstering the tax take.
If fact the talk on the street is now for another rate cut… mmmm something that I have said for a while now is more likely than less likely…oh how time can change in a blink of an eye…
The up-shot then is that rates will stay lower, for longer. And the flood of money that low interest rates are sending into asset markets, particularly property, will continue.
This asset boom is just taking off… look at the stock market…the real estate market is next.
There are a wealth of factors lining up to make sure it continues for a long while yet… more on that in future essays…
But for now Wayne ‘Butter-fingers’ Swan is just one of them.
Paul Miles says
How refreshing it is to read regular economic analyses from someone in the internet marketing field who shows balance and real understanding of economic theory and practice, someone who can intelligently assess reality as opposed to perception or propaganda!
Too often lately I’ve read articles or heard seminar diatribes from self-proclaimed internet marketing gurus who show absolutely no understanding of real economic circumstances or principles, but mindlessly echo the ‘3-word-slogan’ mantras of Abbott and Costello – sorry, Abbott and Hockey – and all the loudest Liberal politicians countrywide. This dumbing-down appeals to the simpletons who get excited at the intellectual sophistication of punning “Julia” into “Juliar”, and of course politically it is working a treat.
Don’t get me wrong. I can’t say I’m a great fan of the Gillard Government. The “Butterfingers” epithet fits them perfectly, as they have completely squandered the goodwill of Australians who originally saw them as a fresh wind blowing away the stale cobwebs of the Howard era.
As a swinging voter, I’m extremely disappointed in the integrity of PM Gillard. Not because she broke her promise about the carbon tax – any fool must have realised that an agreement with the Greens would necessitate such a compromise. But it was the way she knifed Rudd and the subsequent character assassination and bald-faced lying about her part in it that soured it for me. Balanced people might have forgiven her for that, and I was prepared to, but she (and presumably her cabinet) keep making absolutely stupid and half-thought-out decisions, and it’s these judgement calls that will ultimately make me abandon support for this government. (And some of the best people on her team who have seen the rocks ahead have already jumped ship.)
Which makes me seriously consider voting informal for the first time in my life as the least worst option in the coming election, because the only thing I can think of worse than a continuation of the slow sinking of the Gillard boat is the utter horror I have of the idea of Tony Abbott in the wheelhouse. And of the vaudeville team that keeps imitating his cues being put into responsible positions. I think I would rather have the old comedy team of Abbott and Costello. At least then there’d be some real comic relief. (And as some commentators are currently pointing out, the economic policies of Howard and Costello were often as profligate as what they accuse Labor of.)
As you have written repeatedly, and as I’ve been arguing to conservative friends since the last election, we have come out of the GFC very well compared to almost everyone else, and I suspect strongly that, had the Liberals been at the boat’s helm with their fanatical adherence to cost-cutting, we could be undergoing some real social stress at present, and very possibly taking on even more water financially.
A case in point is the Newman Government in Queensland that could potentially create a record in lasting only one term after a huge landslide win. The involvement of that other Costello in formulating their slash-and-burn strategy suggests strongly that they may be more interested in ideology and federal political spillover than any real attempt to fix problems. What could be better to convince Australians everywhere – and especially for the coming Federal election – that Labor should never be let anywhere near the cash register than convincing everyone a major derailment is actually a nuclear fuel train wreck? But I haven’t yet noticed any good decisions by this government, nor any improvement in Queensland’s economy.
And for more questions about the common sense of many current conservative politicians worldwide we have only to look at the lemming-like obstinacy of the hard-core Republicans in the USA, apparently prepared to wreck the US and world economies unless they get every one of their demands met. For them it’s better for the American economy to teeter on the verge of collapse, rather than to build a compromise that benefits all (and also admit that the other side currently has a mandate to govern and they don’t).
Then again, if the Liberals replaced the attention-seeking Class Clown with the economically literate and psychologically rational Malcolm Turnbull, I might be more tempted to jump ship myself.
Julianna Ja says
Smart comments Paul. I like what you have to say. Ja
David says
Hi John. 3 years ago I also invested in one of the JB Global ASX200 products which failed miserably. Loved the product, just bad timing.
I have noticed the US and UK sharemarkets have climbed back to previous highs, however I believe this is more due to the devaluation of their currencies rather than any increase in the value of their companies.
If we believe the Australian dollar is to drop back 70-ish US cents, do you think the timing would be right for a JB Global style ASX200 investment now?