The Budget: Lots Of Assumption And Little Impact

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By Greg Peel

When I was a young lad my father used to watch the budget broadcast and I found it all very tedious, particularly if it clashed with Gilligan's Island. By the time I was a young proprietary trader, Budget night had taken on a carnival atmosphere. It was all hands to the phones as the forex and bond traders bought and sold with every utterance out of Mr Keating's mouth, while juggling beers and Chinese take-away.

In later years I found the Budget necessary viewing from a personal tax point of view, and now as a financial journalist, well, it would be remiss of me to avoid it. However, in watching last night's broadcast one can only sigh and think it's no longer any carnival, it's just a circus.

Aside from the perfunctory “hear-hears” from one side of the floor and “ha-ha, ho-hos” from the other, the now mandatory policy of constant repetition is all too much to bear. And it only gets worse when both Treasurer and Shadow Treasurer are post-interviewed by a bemused Kerry O'Brien. The spin doctors obviously insist that major positives or negatives, preferably as catch-phrases, are rammed home ad infinitum. It just becomes a form of “brand recognition” – the sort of subliminal torture that keeps companies like Coca-Cola spending vast sums on advertising when they probably don't have to. It also makes the likes of Swan and Hockey seem like wound-up clockwork dolls.

So yes Wayne, we get it – the Budget will be returned to surplus in three years and aren't you wonderful. And yes Joe, we get it – the government's numbers are all a load of rubbish. “But they're the Treasury's numbers,” Kerry correctly pointed out, “the same Treasury you guys had”. Clockwork Joe stumbles for only a microsecond before denouncing everything and anything once more.

So what we have is a government that has delivered Budgets that were, at the beginning of the term, a large surplus, then a six-year deficit, and now a three-year deficit. In each case, the Budget estimates were rendered invalid only a brief time later (which is why we have six-month updates as well) given a change in global circumstances. And, of course, there will always be a change in circumstances, one way or another.

That's why my eyes always roll into the back of my head when I hear politicians taking about numbers for 2015-16 or some other distance. They're meaningless. It would provide as much value if the Treasurer simply stood up and rattled off Treasury's predictions for the winning Lotto numbers in that year. It's also why I strongly believe policy surrounding superannuation contributions and tax etc should be written into the constitution and thus untouchable by each successive set of increasingly incompetent clowns occupying parliament. How can we plan forty years ahead if the goal posts are going to be moved a dozen times in the interim?

Nevertheless, Hockey was at least correct in pointing out the obvious, that being the “return to surplus” claim relies entirely on the government's extremely bullish forecasts for bulk mineral prices over the period (which Alan Kohler also rightly pounced on) and that later revenues rely on the new resource tax being legislated as is. In the case of the former, I return to my Lotto number analogy. In the case of the latter, that tax policy will undoubtedly be watered down before it becomes legislation, if it ever does become legislation.

But I'm not giving any special credit to Joe. Were the boot on the other foot the level of bovine manure would be just as substantial. However, each year we have a Budget and it has to be based on forecasts. It's all we've got.

That said, readers have no doubt already pulled a muscle carrying in their copies of today's daily print media offerings and a whole day of excitement is offered by wading through the extensive coverage. FNArena is not going to bore all and sundry with the same. What follows is a quick summary of how stock analysts and strategists see last night's Budget impacting on relevant sectors and stocks.

The major points which emerge from analyst general opinion are: (1) there was little in the way of that which we haven't already been told about; (2) what was new was not particularly material; (3) the figures rely entirely on very bullish forecasts for bulk minerals and so that's where it could all fall down, long before the RSPT kicks in; and (4) given the minerals forecast, the inflation forecast seems underdone, so watch out for more interest rate rises if they're correct.

Analysts were quick to point out the Budget's implicit reliance on China in the longer term vis a vis the near term possibility of a Chinese property collapse and notwithstanding the current situation in Europe. But leaving that aside, assessments were made of the modest impact on sectors of the few new measures.

The cut in bank deposit tax is in theory bad for equities, given deposits become more attractive, but is too immaterial to be of any real concern (and won't kick in for a year). It is on the one hand a positive for banks because it encourages more of their cheapest form of funding, but by the same token it will spark more competition amongst all banks, big and small.

The income tax cuts are equally minimal (and won't kick in for a year) and aimed at middle to low income earners. This is a mild positive for retail sales and thus the consumer discretionary sector.

Another inquiry into aged care might be a positive for those REITs in the retirement game such as Stockland ((SGP)) and Lend Lease ((LLC)). But by the same token, Macquarie points out that rising commodity prices implies inflation implies pressure on retail and housing, which offsets the above for consumer discretionary and REITs.

Healthcare is also a bit of a two-edged sword. While spending in the area has been doubled, most of that will go to the public system, and that implies at the expense of the private system. Although medical centre operators such as Primary ((PRY)), Sonic ((SHL)) and Healthscope ((HSP)) may see a benefit if only the Merrill Lynch analyst could get hold of some more detail.

The spending on renewable energy specifically targets new energy sources, so is not of any help to your Origin's ((ORG)) and AGL's ((AGK)) etc. But smaller listed renewable energy stocks which are developing anything from wave energy to geothermal and beyond should benefit.

On the infrastructure front there's not much new, although Asciano ((AIO)) should benefit from rail network upgrades.

As for the mining industry, well – we've already been there. And we know that the wealth management industry will benefit from super changes.

So all up it's a bit of a neither here nor there. All analysts were impressed that Swan managed to keep his word by delivering a nothing Budget in an election year, but warn that spending promises may change if Labor continues to slip in the polls. And then it could simply lose the election, and we're back to square one.

It must also be noted that a diminishing deficit means diminishing government bond issuance. Less supply is good for bond prices, but then we're in a tightening phase and rates will rise. Less bond supply also returns focus to the stock market, but then stock/bond relationships are never quite that simple.

The six-month Budget update is due in November. Aside from the global markets being one big chocolate wheel before then, one presumes it will be an update hastily thrown together just before the election. Anything could happen.

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