Last year Treasurer Wayne Swan was too responsible and was tricked by Treasury’s less than accurate forecasts for economic growth — the end result was not a planned surplus but a bigger than expected deficit.
I recall a scene from an old Seinfeld episode, where Jerry advised his friend George that as he complained that everything he does is always wrong, then the opposite must be right. George changed what he ordered at restaurants, he told the truth to women about his joblessness and the fact he lived with his parents, and they liked it!
Similarly, a more irresponsible Budget would mean more debt and a bigger budget deficit but it would also mean more demand pumped into the economy, when Treasury thinks growth will be around 2.75 per cent. If we get growth under 3 per cent, unemployment tends to increase, so the Government needs to help growth and a mildly irresponsible budget would help.
A lower dollar
It could also push the dollar lower, which is already on track to get to 95 US cents by July next year, if you accept Westpac’s new view. But the more expansive budget could stop the generosity of the Reserve Bank. Many economists expect at least another rate cut but I reckon fiscal stimulation would be better and more direct. We won’t have to wait for the new saving Aussies to decide to open their wallets and purses.
A lower dollar would help so many import-competing businesses and raise exporters’ incomes, which would help offset the slower mining industry, which I don’t expect will contract as badly as some expect.
The Yanks will also help with the dollar, as it will strengthen when the Fed stops buying $US85 billion worth of bonds each month. This was rumoured in the Wall Street Journal late last week to be on the way and that has helped the Aussie dollar fall under parity.
As for China…
The dollar was also weakened by the soft data on China but I don’t expect that to last. I think China will eventually pick up its growth over 2013-14 as Japan and the USA grow more quickly. We will even see better signs of economic life out of Europe by year’s end and all of this will help stocks, which in turn helps business as well as consumer confidence.
On China, industrial production actually rose month on month in April but less than was guessed by fallible economists. The fact that fixed asset investment was softer than tipped is not great for commodity prices but I don’t trust one month’s data on anything.
I’m betting the Chinese leadership reads the same stuff I do, and even more accurate reports as well, and if a slowdown was on the cards, they would respond.
Meanwhile, in the USA, the housing sector is rebounding and US companies have reported better than expected. At last count, Reuters says 90 per cent of S&P 500 companies reported quarterly results and 67 per cent beat earnings expectations and 24 per cent were under forecasts. If this trend continues, earnings will be up 5.3 per cent on last year, when a number around 3.5 per cent was expected.
Sure, sales numbers were 1 per cent below estimates on average and only 46 per cent of companies topped their revenue forecasts, but the overall results are good for company balance sheets.
Some time over 2013-14, the Fed should ease up on bond buying and they will hope that US companies will start using their greatly improved balance sheets to invest more and hire more. This will help the Yanks start to repay public debt, as economic growth does that sort of thing.
Hey, little spender
What I have described is the best case scenario and a lot has to go right for the best result. It could happen but it might need more time and there is bound to be a worry or two along the way, and as our public debt to GDP is big in dollars but low as a percentage of GDP, I think if a slightly irresponsible budget helps GDP grow, it actually helps a future government not only get on top of the dollar debt but it sends us on the road to budget surplus.
On Wall Street, the Yanks still are positive with small sell-offs the worst we’re seeing at the moment and that’s because they believe the US recovery story and they like the Fed’s bond buying.
If the Fed stops early, it will challenge the stock market rally and that’s why it’s not a bad idea for this Budget to be a little bit expansionary and a little bit irresponsible.
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