Regardless of your political views – or your view on whether you think the budget is good overall or not – the key takeaway for me in this budget is that there is nothing to cause undue worry to investors. There is nothing that, for instance, adds to the case for a shift out of resources or to sell apparently overvalued banks.
In fact it’s quite the opposite, and in a market where investors are rightfully skittish – bombarded with an array of conflicting advice – I think investors should probably take heart from this budget.
Think of some of the big macro themes being discussed, you know the drill: The mining boom is ending, we are witnessing a growth slowdown here and abroad etc, the unemployment rate is going to rise.
Well there is no sign of any of that in this budget.
Importantly I don’t think this reflects an over–optimistic Treasury desperate to fluff up their revenue estimates for the government. Keep in mind that the government instead wanted to find scapegoats for their failure to deliver a surplus. They have done that to a degree and certainly I think Treasury has been overly cautious. However, to be fair, they haven’t milked it as much as they could in this environment. Indeed, given the current macro debate, that in itself is telling. They didn’t milk it because they couldn’t.
Now the government has forecast quite a change in its revenue estimates – a shortfall of about $30 billion over the next two years, and that’s already got a lot of press. To read much of the associated commentary from analysts, this shortfall reflects the deteriorating global backdrop, a declining terms of trade and the imminent end to the mining boom – which in turn are affecting tax receipts.
Yet, that’s not what is on display in this budget and to focus on the shortfall gives a misleading economic picture. The Treasury itself doesn’t expect any of the above. For instance, Treasury’s estimate of China’s economic growth is actually quite strong – just below 7.75% and 4.75% respectively over the next year or two. Growth in the East Asian economies is expected to rise sharply – close to 5% over the next two years from 3.8% – and this region is as important as the US and EU to global growth. It is all the more important for our trade.
This is why the terms of trade is not expected to deteriorate significantly from here – maybe down 1% or so over the next couple of years, and that’s with a forecast decline in iron ore prices from current levels of $US130 a tonne down to $US100 over the next couple of years. By and large the terms of trade holds up well. This is critical, given the preoccupation in the market with a slump in the terms of trade and end to the mining boom etc.
The government itself doesn’t forecast an end to the mining boom per se, which I think is right, but it stands in marked contrast to some of the more bearish commentary out there and I’m surprised given that this is a government looking for excuses. In the end they forecast a further 5% increase in mining capex next year after an 18.5% rise this year.
The whole economic discussion is out of kilter with what the budget is showing. Indeed, it’s not even the case there is a revenue hole to fill. Revenue growth, even with the downgrade, is expected to be strong, rising by 7.7% this year and 6.2% next. This is solid revenue growth, which reflects the fact that the Australia economy itself is doing well and the fact our terms of trade is still at a record. The reality is there is probably some significant upside to that given the strong prospects for growth in our major trading partners and the upside this presents to iron ore prices. Already iron ore prices are surprising to the upside.
The other issue, of course, is that there is still no sign of any real fiscal consolidation. That might make for bad economics and, subject to your view, does not make good long-term policy. But in a stimulus-obsessed world, some would say stimulus-addicted world, it does provide for a good near-term domestic investment backdrop.
Recall that the government’s previous forecast was for fiscal policy to detract 3 percentage points from GDP this year – it was used as a major justification for why the RBA should cut rates. Instead the government now projects a fiscal contraction of just 1.7% in the year to June 2013 and, for next year, its forecast is at 0.5 percentage points, which is so small as to be meaningless.
Of more importance, government expenditure, which was expected to fall by 0.5% in 2012–13 is now expected to rise almost 1% for that year, which is a decent turnaround and extra added boost to domestic GDP growth – especially because we know that, based on past budget outcomes, actual expenditure will be even higher. For 2013-14 we are looking at a lift to government spending of about 4.5% – again based on past misjudgements that should be closer to 7% .
The bottom line? Investors can look forward to considerable economic stimulus from monetary policy and the truth is that this isn’t being offset by any fiscal consolidation. Indeed, there are no significant signs of economic weakness. Despite all the focus on the revenue shortfall, revenues remain strong, and the government hasn’t cut back on spending in any meaningful way. It’s good for growth, it’s good for the housing sector, and there are some encouraging signals on the infrastructure front. Moreover, there is little to suggest that our miners are a ‘sell’. All in all, a very investor friendly budget.