Australia | May 13 2009
By Greg Peel
Treasurer Wayne Swan has delivered a budget that sees Australia running a fiscal deficit of $57.6bn in FY10, representing 4.9% of GDP. What that means is that the government will spend $57.6bn more on policy programs than it will receive from revenues stemming from taxes and other charges. The amount of the shortfall is equivalent to 4.9% of Australia’s entire economic production for the year. That shortfall needs to be borrowed by issuing government bonds.
Clearly it is incumbent upon the government to budget, just as any business or household must or should do. It is also necessary to project into the future, as there is no point in just thinking about financial next year and not considering what might happen thereafter. Hence we have the government’s projection that net commonwealth debt will reach 188bn or 13% of GDP by FY13. The government expects to run a deficit until FY15, at which point the budget will balance, and then FY16 will show a return to surplus.
In 2015, the Waratahs will win the Super 24. The Central Coast Bears will win the NRL and Tasmania will take the AFL flag. Prime Minister Garrett will be summoned yet again to Beijing to explain why the Broken Hill & Shanghai Proprietary has failed to meet strict new production quotas. Stevie Wonder will hold an emotional concert in Central Park, seeing his adoring fans for the first time through his new bionic eyes. Americans will be glued to their TVs, praying that damaged space shuttle “Martin Luther King Jr” safely limps back from Mars. Of all this I am certain.
Don’t believe me? Well why, then, would you assume budget projections out to 2016 (not to mention a new pension plan in 2023) have any valuable meaning whatsoever? Peter Costello was preaching everlasting prosperity in his last budget for FY08, and Wayne Swan was still on about surpluses ahead of FY09. The point is that budgets are based entirely on “forward estimates”, and for those you might just as well employ a crystal ball.
Next year there will be a new budget.
That’s not to say we should ignore the more immediate government policy plans. The government will run a budget deficit which, at 4.9% of GDP, pips the 4.1% of GDP Paul Keating racked up in the 1990’s “deficit we had to have”. But considering the White House announced last night that the equivalent US fiscal budget would be US$1.8trn, or 13% of GDP, the government is justified in making a big point that Australia is a lot better off than most of the rest of the world. Most developed economies will be running deficits in excess of 10% this year.
The projected deficit was close enough to what the government had already leaked. Budget “leaks” these days almost amount to overt press conferences. Given the leaks were mostly on the positive side of the ledger, Australia was braced for the budget “nasties” to be revealed last night. But basically there were none. The only time the Opposition found cause to theatrically feign horror and indignation during Swan’s speech was in the case of the pension age increase to 67 in 2023. At that point President Minogue will be 55 herself.
Budgets, of course, are as much to do with politics as they are with money. The G7 finance ministers agreed last month that the global economy would begin to recover by end-2009, but G20 member Wayne Swan immediately aired his scepticism. The G7 declaration is likely much about spin anyway, but as more than one economist maintains this morning the government’s budget projection of 0.5% negative GDP growth in FY10 is comparatively bearish, and probably overly so. As the next election is not until 2011, better to warn of doom and gloom and then look like sound economic managers when a positive reading is actually forthcoming.
Having said that, Swan’s next projection of a sudden leap to 4.5% growth in FY11 looks a bit ambitious. But as I have alluded to, the further out in time we go the less realistic any projection becomes by definition.
So best to deal with the here and now. The stock market is down this morning, but not by much. I can already hear the evening news bulletins suggesting a “negative reaction to the budget” but the reality is we’ve run up a long way and it might be time to take profits. The only real effect on the stock market from the budget is a sector-specific one, and various sectors had wins and losses which I will outline in a moment – none of them a shock.
Before that, in the case of the stock market in general the more macro effect to consider is how the budget deficit affects the bond market. The government now, for the first time in over a decade, must issue a large amount of government bonds to raise the money to fund the deficit which, in simple terms, is just a loan. The more bonds it issues, the higher the yield on those bonds the market will demand. Higher bond yields then become attractive in a time when stock dividends are being cut. Rising bond yields can drag money out of the stock market.
One must also remember that Australia, like the US, runs a historically high current account deficit. This implies that over the last decade we have spent more than we’ve earned, or forked out more to buy fridges from China than China has paid for our iron ore. China has an opposite surplus, so it can afford to fiscally stimulate (run a budget deficit) till the cows come home while still having net cash in the bank. Australia is now going into double-deficit, and is a net borrower. The risk is that Australia needs to borrow too much – issues too many bonds – and can’t attract the lenders. To attract lenders the RBA would be forced to do what an insolvent Iceland had to do – raise interest rates.
How would you like to pay more for your mortgage right now?
But that is a worst case scenario. The reality is that the government is justified in believing Australia is in a relatively reasonable position, and is well-positioned if Chinese economic growth rebounds – another assumption which is not unreasonable. It’s just not going to happen overnight.
But on to the sectors.
Infrastructure is a winner, given the government is pouring even more money into infrastructure than earlier flagged, to the total of $22bn. This is good for construction and engineering and services stocks, materials stocks, and to some extent real estate developers. The spending will go on for some time, but one must bear in mind that many stocks in the related sectors have already run hard on such anticipation.
The government has fiddled the tax scales, such that the tax rate income between $80,000-180,000 will drop from 40% in FY09 to 38% in FY10 and 37% in FY11. The 15% bracket is $6,000-34,000 in FY09 but the step-point into the 30% bracket will expand to $35,000 in FY10 and $37,000 in FY11. All up these moves should benefit both consumer staple (food and beverages) and consumer discretionary such as your Hardly Normals and DJs. Gaming should also benefit.
Anything to do with renewable energy is on the winning side.
Healthcare is a big loser, but then if you want to take the risk and play the sector most heavily leveraged to political whim, such is your lot. The healthcare rebate has been reduced for higher income earners and the Medicare safety net has been capped on any “excessive” doctor fees. This impacts on all of your Healthscopes, Ramsays, Sonics etc.
Wealth Management is another big loser, via the reduction in the limit on super contributions. In short, super managers such as your AMPs and AXAs will see less funds flowing in. However, these changes rather pale in impact when one considers the damage that may be wrought on the super industry from the results of the current enquiry into fees and charges.
For builders, it’s a toss-up. The residential building sector has received a big boost from the government’s first homeowner grants which formed part of the government’s stimulus package. The grants were due to expire on June 30, so the fact they haven’t is a good thing. But they will only be extended for six months at a reduced rate. Those looking for a full-year, full-rate extension will thus be disappointed. The grants have had a big, big impact on new housing demand and subsequent mortgage demand. But when the music stops, what we’re left with is rising unemployment and falling house prices.
That’s about the gist of it. We were expecting Swan to deliver plenty of budget “nasties” but there weren’t any really. There was increased spending however, and the conclusion of economists is that this is a low impact budget designed to “nurse” Australia through recession rather than haul it up out of recession as quickly as possible.
Now we just have to wait and see what the FY11 budget will be like.
