Yesterday’s MSM budget discussion was shockingly bad. Most worryingly, both criticism and praise of the Depressionberg budget was wrong and misleading, suggesting Australia has lost the capacity to even debate vital economic decisions.
On the critical side, Bernard Keane at Crikey composed misleading reams. To begin with, we got this:
The Morrison government is counting on the private sector and cashed-up workers to drive a surge of economic growth, fuelled by a half-trillion dollar deficit binge that the government believes will return unemployment to 2019 levels by 2024.
…It’s not quite trickle-down economics, but it’s a massive, debt-fuelled Keynesian investment in animal spirits intended to lift a struggling economy somewhere back to where it was before the pandemic hit.
If it ever does, we’ll still have a national debt that will take decades to pay off.
Then more in a second piece:
If one of the key questions about the 2020 budget was whether the government was prepared to spend enough to support the economy, it was answered resolutely in the affirmative in Table 1 of Statement 1 of Budget Paper No. 1 which showed deficits totalling $480 billion stretching off to 2024.
The Grattan Institute had suggested the government needed to spend another $70 billion to $90 billion in 2021 and 2022 on top of its $180 billion in deficit spending already committed this year. Josh Frydenberg went way beyond that with another $112 billion deficit next year and deficits to the end of the forward estimates and then beyond into the forecasting haze of the late 2020s.
And the deficits aren’t just the result of lower tax revenue — despite justified criticisms that revenue forecasts still look too optimistic — but a massive expansion in the size of government.
First, the budget is not fiscal stimulus. The majority of the 2020/21 deficit has already been spent in 2020 and it is much smaller in 2021/22. That means that the fiscal impulse is going to decline sharply from here and detract from, not add to, growth.
Second, it is not remotely Keynesian. Keynesian stimulus is targeted at government deficit spending and investment to lift demand directly. It is not tax cuts for the simple reason that they do not work when the urge to deleverage or save seizes the private sector and demand falls. As well, most of the tax cut spending is for the supply side of the economy even though we have far too much of it.
Third, there will be no terrible legacy of national debt given the RBA is already controlling interest rates for sovereign bonds in the secondary market and will, in due course, be buying the government’s bonds direct.
In short, Bernard Keane’s (and most of the journos) criticisms operate from a grab bag of political truisms derived from Australia’s bastardised political discourse, not from economics or, for that matter, the economy.
Praise for the budget came from the predictable quarters of “business” but it has no idea, either. Check this out:
Billionaire retail magnate Solomon Lew says last night’s federal budget is the most well-thought-out budgets he has ever seen in his career.
The Premier Investments chairman said it cannot be understated “just how much this will provide a shot in the arm to employment, youth job creation, consumer confidence and spending”.
“This budget will help bring the Australian economy out of the doldrums and back to where it needs to be,” Mr Lew said.
“Treasurer Frydenberg and the Morrison Government should be commended for delivering such a formidable, and importantly manageable, budget that will provide a much-needed boost to national economy and the broader retail environment.”
Or this:
Adbri chief executive Nick Miller says the government’s budget will support job creation and stimulate economic growth.
“Combined with the recent positive progress in gas policy, the investment directly into state infrastructure projects while encouraging business investment through tax write-offs for critical assets will help drive competitiveness, efficiency and support Australia’s economic recovery,” he said.
Or this:
Australian shares are surging after a “go Australia” budget, according to AMP Capital Portfolio Manager Dermot Ryan.
“This year’s federal budget is a go Australia moment like no other and business is leading the charge,” he says
“Business spending stocks – like auto and equipment exposed sectors – are all up strongly.
He notes that business and middle-income support packages accounted for half the $100bn spending in the Morrison government’s recovery budget.
And on it goes.
First, energy prices will rise under the gas unplan because it leaves the gas cartel fully in control of Australian gas reserves. The only hope for lower prices now is LNG imports.
Second, sure, rorting the taxpayer for pay subsidies and investment is fun (especially for retailers) but all of the supply-side stimulus in the world won’t help if there is no demand to service as incomes are gutted, especially in the absence of immigration to artificially boost demand via more warm bodies.
Third, infrastructure is fighting a receding tide of NDIS and NBN spending and can’t add much to growth given it is the rate of change in spending that matters.
Bloomie provides a net survey of market economists which is nearly all bull as well:
Commsec:
- Tax cuts have scope to boost consumer and business spending; If people are confident about job prospects then discretionary retailers such as Harvey Norman, Premier Investments and JB Hi-Fi will benefit
- Interest rates to stay low for next three years, meaning capital growth and dividends will be important to attract investors; NOTE: Fortescue, AMP among companies with highest projected dividend yield next 12 months, based on BDVD forecasts: Bloomberg data
- Infrastructure spending plans, state government incentives and low rates to support mining and construction sectors; Adelaide Brighton, Lendlease, Boral, Brickworks and Bluescope may benefit
- Decision to extend first-home deposit plan may support property developers and residential builders like Stockland, Mirvac, James Hardie
- CSL, Cochlear, Resmed may benefit from plans to boost manufacturing spending, while fuel security plan may help Santos, Woodside, Senex and Ampol
- Still, migration outlook remains uncertain; Lack of foreign students, tourists and workers may impact travel firms, airlines and other tourism-based businesses
- NOTE: May impact firms including Crown Resorts, Star Entertainment, Qantas, Flight Centre, Corporate Travel Management: Bloomberg
- See ASX 200 rising to 6,450-6,550 by June 2021; Benchmark closed Tuesday at 5,962.07
Jefferies:
- Budget supportive for healthcare sector, with focus on coronavirus diagnosis
- Government unveiled increased funding for clinical labs to go with previously announced spending for aged and primary care
- Reasonably benign regulatory environment for Australian health and aged care firms in near- to medium-term during Covid-19 and its aftermath
- No changes to forecasts for stocks including Estia Health, Healius, Japara, Regis Healthcare, Sonic Healthcare, Sigma and Virtus Health
Morgan Stanley:
- Budget is a stockmarket friendly one with clear focus on consumption support and business
- Sets a stage where equities positioning is important; “Leveraging to the broader fiscal theme, gaining exposure to longer-dated reopening plays and embracing more broadly the prospect of cyclicility and rotation has been reinforced”
- Consumer stimulus carries greater duration, infrastructure offers stability, while virus evolution remains key
- See measures supporting business investment and lower unemployment as positive for banks
- Changes to private health insurance seen supportive of system and may also feed into hospital operators
- Healius and Sonic Healthcare have exposure to Covid-19 testing, which secured additional government funding; Suggests upside to current test assumptions, although volume will reflect demand
- While there was some additional investment for aged care, more details for sector not expected until 2021
- Construction components of budget support preference for Adelaide Brighton amid focus on “shovel-ready” small-to-medium-sized projects projects
Macquarie:
- Australian budget deficit is large but broadly within range of market expectations
- Pro-growth budget seen as supportive of a rising equity market, although given most measures were pre-announced the immediate impact is seen as minimal
- Consumer spending support likely from tax cuts and payments to the elderly
- Infrastructure investment likely to help companies including Downer EDI, Monadelphous Group, Cimic, Service Stream and Transurban, while construction firms CSR, Adelaide Brighton and Boral to also benefit
- ‘We see a global wave of infrastructure stimulus as positive for resource stocks. Investors should continue to rotate to value and companies negatively impacted by Covid-19”
Goldman Sachs:
- While not a significant amount of direct support for infrastructure and aviation stocks, they are likely to benefit if the budget achieves the broad-based increase in activity it is targeting
- Qube among infrastructure firms that may benefit from increased trade via consumption and manufacturing production
- Transurban and Sydney Airport more likely to get boost from increased consumer activity rather than direct road investment impact
The only house to get it right was Citi:
- Budget actually results in “significant step-down in stimulus provided” in 2021
- Stay cautious on discretionary retailers with elevated P/E ratios; Impact on retail demand is positive but needs to clear high hurdle in 2021
- Volume of stimulus from tax cuts and pensioner payments “pale in comparison to the stimulus paid in June and September 2020”
- Wage subsidy plan may boost Ebit 1% for retailers that can add staff, particularly supermarkets; Full expense of capex may lift operating cash flows 5%-10%
- Super Retail, Coles and Woolworths may benefit from these changes
- Infrastructure spending proposals may drive small earnings uplift at Adelaide Brighton, Boral
- Homebuilder program not extended; While it did pull forward some work into FY21, medium-term housing risks from stimulus wind-back and border closures remain
“Business”, “journos” and “analysts” will form a screaming chorus for more traditional Keynesian stimulus next year as this mad tennis-pro experiment in lieu of basic economic wisdom tumbles into a deflationary abyss.
