The asset-boom is just taking off, and our mate Butter-fingers just added several number of years to it’s run.
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.