The Budget was massive, but I think we have more in store.
What do I make of this week’s budget?
It’s massive. But there’s more coming.
That’s what I reckon.
First up, the headline numbers are huge. We’re looking at a budget deficit of almost half a trillion dollars. We are still well and truly in unchartered territory here. No one could have ever imagined that the Australian government would be handing down that kind of deficit a year ago, let alone a “debt and deficits disaster” Coalition government.
But this is where we’re at.
It’s a huge amount of money.
But I still think there’s more coming.
And I say that because the two key centre-pieces of the budget – the wage subsidy for young workers, and the instant asset write-offs for business investment – are activity generated.
That is, they rely on the private sector doing stuff for them to come into effect.
So if you’re going to give companies a subsidy if they employed a 19-35 year old from the ranks of the unemployed, that requires firms to actual go out and hire people.
While this measure is estimated to be worth billions of dollars, it is theoretically possible that if no firms employed no new workers, that the total cost to the budget would be a doughnut $0.
Same story with the asset write down. If firms invest, there might be a certain tax advantage for that. But if no firms invest in no new things, then the measure is worthless.
That means that this free-spending budget actually needs a catalyst before it become active.
And what’s the catalyst?
Economic activity itself. It needs firms to hire and invest. If they don’t, then there’s nothing.
So this epic budget positions itself as a rocket pack strapped to the top of an economy that’s already moving.
But what if the economy isn’t moving?
It’s possible.
The government’s projections for growth and jobs were characteristically over-optimistic, but not wildly so.
But still, there’s a lot of money exiting the economy right now, as the governments front-line support measures – particularly JobKeeper and the JobSeeker supplement – are already being wound back.
This chart from the AFR shows you what the ‘fiscal cliff’ we’ve been hearing about for so long is now looking like:
And that’s at a time where private demand has already fallen through the floor, and public spending is the only thing propping up the economy.
And so what you’ve got is about $30 billion worth of direct government spending being replaced by a wage subsidy worth $4bn, and an asset write-down worth $27bn.
So it kinda balances out, right?
Well, no, not exactly.
It’s a bit apples and oranges because you’re replacing a direct cash injection, with indirect support that’s conditional on firms taking the risks involved in hiring and investing.
What it means is that if the economy is already recovering and continues to recover, and firms are happy to hire and invest, then we should get a reasonably smooth transition.
But if they don’t – if firms and households are still spooked – especially as JobKeeper winds up – they we might end up with a very bumpy transition.
In the short term, that will lead to two things. The first is that the government will decide it needs to support the economy more directly, and it will go back to mainlining money straight into the economy.
The second is that it will call in the RBA artillery, and we’ll get further rate cuts and reduced mortgage rates.
My guess is we’ll get both.
My hunch, based on what I know about animal spirits, is that everyone will want to take a wait-and-see approach, and the government we’ll be forced to intervene more aggressively.
In the long run, that means even more money finding it’s way into the system, and we’ll have an even bigger rebound boom baked into the outlook.
So that’s my take on the budget.
It’s huge. It’s massive.
And it’s only round one.
JG.