Fiscal pussycats play it safe

The Budget assumes an improving economic scenario … but can we believe it?

For investors, this budget is a happy non-event, especially after last year’s shocker:

  • no change to superannuation tax
  • no change to retirement withdrawals
  • no change to negative gearing
  • no change to capital gains tax.

Move along, nothing to see here.

As previously announced, there will be a give and a take with the age pension means test: the asset free area increases and so does the taper, the net result of which is a saving of $1 billion a year after next year, so not an insignificant change.

But for investors, it comes down to what impact the budget will have on the economic outlook, and more specifically on consumer and business confidence, which were both so damaged by last year’s budget stuff-up.

(To remind you: the Government screeched about a deficit and debt  emergency in the lead up to the budget, thereby damaging consumer confidence, then sprung a set of drastic surprises on budget day, damaging confidence further and then to top it off, failed to get most of the nasties through the Senate).

I reckon the main emotion that consumers and businesses will feel after this year‘s budget will not be confidence, but bewilderment.

What is this Government on about? What does it stand for? Last year it was a tough, reforming Government, transforming university funding, introducing a Medicare co-payment, dealing head-on with the unaffordability of the age pension, completely shifting Commonwealth-State financial relations and at the same time rapidly getting the budget back into surplus.

This year Tony Abbott and Joe Hockey are fiscal pussycats. To drive that point home, the budget centrepiece is even a big increase in middle-class welfare through childcare subsidies, funded by cuts to family tax benefits (to parents who stay at home and don’t access childcare).

Now, it’s possible that the absence of bad news will be enough to spark a recovery in consumer and business confidence sufficient to offset the end of the mining boom and return the economy to good health, but I doubt it.

For that to occur, there would need to be some other form of stimulus, and specifically what I have in mind is currency devaluation.

If the Aussie dollar was at US70c and the budget was not getting in the way, either through nasty surprises or fiscal austerity, then you might have reason to be optimistic about a return to trend GDP growth (of about 3.25 per cent).

But it’s not: the dollar is around US80c and therefore, according to the RBA, still too high to generate economic growth.

And unfortunately for the RBA, the dollar went up after last week’s rate cut, not down – partly because the US dollar weakened, and partly because the market saw that the “easing bias” had been removed from its language.

At least fiscal policy, if you can call it that rather than political policy, which is what budgets have become, is no longer arguing with monetary policy.

But we’ll see what happens when growth falls short of the 3.25 per cent forecast for next year on which the “credible path back to surplus” is based.

This year’s balancing act between fiscal consolidation and economic stimulus was tricky enough; wait till there’s an actual recession after a decade of deficits.

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