This week Sid Ruttala gives his cursory thoughts following the introduction of Appropriation Bill (No. 1), alternatively referred to as the budget. And what a budget it was, a lot was at stake given that it is arguably the most important budget since WWII.
Heading into the budget, it was never in doubt that it was going to be big and deficits were likely to be blown out. The proportionality was what I found particularly surprising. What is almost guaranteed now is that QE is very much on the cards and the cash rate is likely to fall further. The thought process is that if the yields on new issuance, especially longer duration (i.e. five- and ten-year treasuries), fall outside the target range of 0.25% then open market transactions are high on the list of probabilities. Watching the markets and recent trading, they already look like they are pricing in the probability of monetary policy easing, with the smart money betting on a rate cut before the year is out, though Lowe has been adamant that 0.25% is the lower bound. The next major meeting should be on Cup Day which, if you didn’t already know, falls on the day before the election Stateside (both November 3 in local time zones).
The target, as I have mentioned in previous articles, is to keep inflation within the 2-3% band and let it overshoot while keeping a lid on the rate. This is especially likely to be the case given the amount of issuance that is going to be undertaken through the course of this financial year.
Frydenberg’s Moment in the Sun
So now that we have the monetary policy context and most new issuance is, in all probability, likely to end up on the balance-sheet of the RBA, let's look at the actual budget. And the major winners (yes, there is overlap).
Research & Development
My Overall Impression
Granted, as an economic conservative, the ballooning of Net Debt and fiscal expansion does not sit well. But the budget was something I found to be equitable and forward-thinking. The support for manufacturing in Australia and increases/incentives for R&D is not only long overdue but crucial for the future economic survival of this nation.
The big gamble (arguably) is that the new incentives outweigh negative business sentiment enough to get capital expenditure to grow (and bring it forward). However, I believe this is a gamble worth taking. This budget when compared it to its counterparts across much of the developed world, including the UK and US, must be applauded in that it did not go for short-term fixes, such as direct stimulus to boost consumer spending, but used Covid as an opportunity to make secular and structural investments that included regional Australia and infrastructure (though industrial relations reform does not seem to be on the Government's priority list any longer). These investments are vital in my view, especially regional Australia which needs investment in order to revitalise an economy recovering from drought, bushfires and now a pandemic.
The tax cuts will add some stimulus in the short-term but might be misplaced in the sense that it may just end up not being spent, especially in the face of economic uncertainty, but if it does go towards paying off debt it addresses the other significant problem in the economy, that of household debt.
What I would perhaps have liked to see is a matter of more stick and less carrot. The business incentives were substantial enough to see increases in capital expenditure but there should have been more around penalising those that don’t. Sounds rather Orwellian but the budget deficits and net debt which pay for these incentives have to be paid off by future generations, the least we could do is to at least get bang for our buck. Granted, the wage subsidy for the 16-35s does address some of this issue, including youth unemployment. Something along the lines of having states compete with each other for the road safety upgrades, the “spend it or lose it” tack might have been interesting to see but the question of how this would look like in policy reality, I’m not too sure about.
Overall, a stellar budget and kudos to the PM and Treasurer. Some of the assumptions were optimistic around GDP growth, but forgiven in order to calm the nerves of the more conservative wings of the party.
Markets & Commentary
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