Treasurer Jim Chalmers will hand down his Budget on Tuesday night knowing it will be judged by many measures – but two will matter most. How he answers those questions will shape not just our economic outlook, but his own ambitions for the top job.
While Treasurer Chalmers’ Budget tomorrow night will have many tests applied to it to determine its overall quality, there’ll be two that will make or break his reputation and, ultimately, his ambition to be this country’s prime minister one day.
The first test is this: does his fiscal plan lead to greater productivity, which is the prime reason why our inflation is so high?
And the second is: does his Budget increase or decrease the chances of another rate rise from the RBA?
The best gauge about the answers to these tests/questions will be the stock market, which will also react to the proposed changes to the capital gains tax discount. Of course, these so-called reforms will have an impact on investment, which is linked to productivity.
For example, entrepreneurs are worried about how the CGT changes could make it hard to attract talent who are often rewarded with shares that currently look attractive with a 50% discount.
abc.net.au captured the concerns with the following: “When Paul Bassat, the high-profile co-founder of job ad website Seek, warned on LinkedIn that the Albanese government’s plan to abolish the 50 per cent discount on capital gains would be “disastrous” for entrepreneurs and “set back the startup ecosystem in Australia by a decade or more”, it caused a big stir in the startup and tax community.”
On interest rates, the investment bank UBS thinks it will lead to another rate rise from the RBA. Despite the deficit Chalmers will give us on Tuesday night, the size of that number will be better than once expected. This is because commodity prices have been rising and inflation has boosted tax revenue going to Canberra, as UBS chief economist George Tharenou told The Australian: “The budget overall remains stimulatory”.
Tharenou says government spending is rising 6-8% a year, with a prime cause being public sector wages, which are rising by 8%. He tips an August rate rise taking the cash rate from 4.35% to 4.6%, which puts him in a minority of economists who remain confident that the RBA’s job isn’t done with beating inflation.
Tharenou implies if the Budget doesn’t impress the RBA, they could move to raise in June!
“The total government deficit including all states widened sharply to $112bn, or 4 per cent of GDP last financial year,” The Australian reported. “Tharenou estimates it will balloon to $147bn, or 5 per cent of GDP this year.”
Tharenou is more pessimistic on inflation than the RBA, and that’s why he sees a rate rise as inevitable. He cites the Albanese Government’s support for the Fair Work Commission’s decision on minimum wages due soon, which should deliver a 4.25% increase, as another issue for inflation and the RBA.
The UBS team points out that the Budget’s impact on property will have a wealth effect, which could hurt consumer spending and economic growth. “Household wealth increased by $1.5 trillion last year and sits at 11 times income, among the highest in the world,” UBS revealed to The Australian.
How the Budget affects both the future of property and stock market investing is bound to be headline grabbers this week. I hope the decisions help a stock market that has been down nearly 5% since February 28, when Donald Trump sent bombs to Iran.
Over that same time, the US stock market is up around 16% and someone in Canberra needs to wonder why? In a perfect world, the Budget would promise changes to build prosperity and a healthier stock market, but we live in an imperfect world.
