THE budget came and went last week with a very clear political agenda to come out of it: that the Labor government intends to win back their traditional voters by ensuring a lot of money is pushed their way through tax cuts and cash bonuses for schoolchildren.
At the same time, the budget appealed to conservative voters who don't think Labor can manage an economy, by declaring that the budget will be in surplus by next year and for three years after that.
But although the budget seemed politically very smart, it was built on assumptions rather than certainties - forecasts rather than actual performance.
The primary over-arching assumption that colours everything else about this budget is that the current government will still be in power in 2013 and beyond. Some of the accounting tricks and new revenue programs used to make the 2012-13 budget look as though it will be in surplus require that the government who put them in place will still have its hands on the levers for most of this time.
In the current environment, that seems a hopeful assumption.
Second, even though the Commonwealth has had low tax receipts since the GFC, the improved budget position is expected to come about because of cuts to government spending and an increase in tax receipts driven by next year's expected growth rate of 3.25 per cent.
Now, 3.25 per cent growth in GDP is a very respectable economic performance - it's just that it hasn't happened yet.
From what I can see of the current economy, strong growth is going to be driven mainly by the mining sector because sectors such as retail, hospitality and manufacturing are not doing well.
Many factors can arise to change growth forecasts because economies are large, intricate things that are managed by people such as Wayne Swan but not controlled by them. And in the case of the growth forecasts from Treasury and the Reserve Bank, it will only take one factor of the economy to stumble - mining - and all bets are off.
Third, there's a raft of carbon tax-related initiatives that have been factored into the budget estimates but the one to watch is the so-called "carbon price" of $29 a tonne.
This represents revenue to the Commonwealth but the more I read about this carbon price - the penalty to be paid by Australia's biggest carbon emitters - the more it becomes apparent that it is not necessarily the price that will be paid by businesses in the next three years when the price is traded. In fact, carbon emissions are being traded in Europe at below $10 a tonne and the momentum is for even cheaper carbon prices.
So, when you consider that a budget is really formulated over a three-to-four-year cycle, the hopes of a $29 per tonne carbon price actually being levied on Australian businesses is not a given.
Last - in terms of assumptions about this budget - is the Treasurer's forecast that official interest rates will decrease into 2013. This will apparently stimulate the economy even as the government cuts its spending.
Yes, it's another assumption, because, as we know, the Reserve Bank is independent of the government. But even if the assumption on interest rates is accurate, it's not entirely consistent with the idea of an economy growing at 3.25 per cent. With growth comes all of the factors that lead the Reserve Bank to raise interest rates.
I'm not saying the RBA always reacts negatively to strong economic activity, but where the economy grows at 3.25 per cent and household consumption grows at 3 per cent (as forecast), the Reserve will act to stop inflation being the outcome of that growth. And that will mean interest rates go up.
While I think this is a smart budget politically, we should all be concerned about an anomaly: the 1 per cent reduction in company tax promised to business owners that the government abandoned on budget night.
I say anomaly because if you base the coming-right of the economy and the balancing of the budget on strong growth in 2013, then you'd expect Australia's 2.7 million small business owners, who employ 60 per cent of the workforce, to play some part in that.
I know the government and its advisers have placed their faith in an ongoing resources boom but that still leaves about 85 per cent of the economy.
When you look at factors such as reduced borrowing, a strong Aussie dollar, reduced consumption, rising superannuation costs and rising costs of power, you see a business community that needs a help along and didn't get it.
However, many householders will be happy with this budget. But can I suggest that everyone who receives their Schoolkids Bonus spend it wisely? The world economy is going through a structural change and our best defence - along with surplus budgets - is an educated population.
Mark Bouris is the executive chairman of Yellow Brick Road Wealth Management, ybr.com.au. Follow Mark on Twitter at @markbouris.
Frequently Asked Questions about this Article…
What are the main assumptions behind the 2012–13 Australian budget investors should know about?
The budget is built on several key assumptions: that the current government will remain in power into 2013 and beyond; GDP growth of about 3.25% next year which is expected to lift tax receipts; planned cuts to government spending; revenue from a carbon price assumed at $29 a tonne; and a Treasurer forecast that official interest rates will fall into 2013. Everyday investors should note these are forecasts, not certainties.
How does the budget’s reliance on mining-driven growth affect investment risk?
The budget’s growth outlook relies heavily on the resources and mining sector. Other sectors mentioned — retail, hospitality and manufacturing — are described as weak. That means if mining stumbles, the broader GDP and tax-receipt forecasts could be undermined, increasing downside risk for investors who assume broad-based economic strength.
Will the assumed $29 per tonne carbon price definitely deliver the budget revenue forecast?
Not necessarily. The article highlights uncertainty around the $29/tonne carbon price, noting that carbon is trading in Europe at below $10/tonne and momentum is for cheaper prices. Because carbon pricing and trading markets can move, the $29 assumption may not materialise and could reduce expected budget revenue.
Should everyday investors expect interest rates to fall as the budget assumes?
That outcome is uncertain. The Treasurer forecasts interest rates will decrease into 2013 to help stimulate the economy while spending is cut, but the Reserve Bank of Australia is independent. If the economy truly grows at the forecast 3.25% and household consumption rises, the RBA may raise rates to curb inflation instead of cutting them.
What does abandoning the 1% company tax cut mean for small business owners and investors?
The budget abandoned a promised 1% company tax reduction, which the article calls an anomaly given the growth assumptions. There are about 2.7 million small business owners who employ 60% of the workforce, and many in the business community were hoping for tax relief. Investors with exposure to small businesses or small-cap stocks should factor in continued tax pressure on that sector.
How might households and everyday investors be affected by measures like the Schoolkids Bonus?
Many households are likely to welcome cash boosts like the Schoolkids Bonus. The author advises recipients to spend the bonus wisely, noting that education is a key long-term defence amid structural change in the world economy. For investors, stronger household finances can support consumption, but the budget also assumes reduced government spending elsewhere.
Which sectors are likely to benefit from the budget’s assumptions and which could be left behind?
The budget’s upside is expected to be driven mainly by the resources and mining sector. Sectors that the article says are not doing well and could be left behind include retail, hospitality and manufacturing. Small businesses generally didn’t get the promised tax relief, so many parts of the broader economy may not share equally in the expected recovery.
Who wrote the commentary and what’s the takeaway for investors reading it?
The commentary is by Mark Bouris, executive chairman of Yellow Brick Road Wealth Management. His takeaway for investors is cautious: the budget is politically smart but rests on multiple assumptions (government continuity, strong mining-led GDP growth, carbon pricing and lower interest rates). Everyday investors should be aware of these risks and avoid treating the forecasts as guarantees.
Call 1300 880 160
Start a chat
Schedule a call
