Budget’s dour economic assumptions are right

Here are the Budget’s major economic assumptions:


Growth for this year has been rounded up slightly from 2.5% to 2.75%, whereas growth in 2014/15 and 2015/16 has been left unchanged from the MYEFO at 2.5% and 3%. Somehow, we’re supposed to grow at 3.5% after that.

Perhaps most importantly, despite swings and roundabouts, public final demand has actually risen from MYEFO’s 1% this year and next, to 1.75% and 1.5% next year. The Budget has been stimulating more than reckoned this year though the fiscal drag will kick in as we move into next year and beyond.

The capex cliff has finally been acknowledged with sizable write downs from MYEFO. The original saw business investment falling 1.5% in 2013/14 and 2% in 2014/15, they have now become -4% for this year, -5.5% for next year and still -3.5% in 2015/16. This is despite rounding up the housing investment component. Finally, they are credible:


The terms of trade correction has also been written down further still from -5% this year and next in the MYEFO to -5% and -6.75% next year:


The reasons are appropriate with coal prices expected to remain weak and the iron ore price expected to keep weakening:


Note that these are realised prices, not spot, that take into account contracts, quality discounts and are in Australian dollars. Here are the assumed prices:


Add $7 for the equivalent spot price. Treasury is still too bullish.

The weak terms of trade are nonetheless enough to keep nominal growth very soft. The changes from MYEFO are significant. This year has been rounded up from 3.5% to 4%. Next year has been cut from 3.5% to 3% and 2015/16 rounded up to 4.75%:


This will be the figure that most aggravates Labor media attack dogs. But it is right in my view.

Unemployment projections are unchanged at 6% for this year and 6.25% for the next two years, despite ongoing declines in the participation rate (which is fair enough given the aging population):


Also reasonable given the capex cliff and unwind in major project employment.

Finally, global growth projections are on the bullish side:


If China makes those rates of growth it will have completely failed to rebalance. Japan and Europe look fair and the US slightly aggressive. I would have had Chinese growth at 6% next year and hence would also have iron ore and the terms of trade lower. But the Budget also assumes that the dollar will remain at 93 cents, which it will not if I’m right about China and iron ore, so the contingency of lower Chinese growth and lower commodity prices is insured via an aggressive dollar forecast.

All in all, these assumptions are more than reasonable and the basis upon which Budget rebuilding can take place for the first time in three years.


  1. 1) The assumptions are made using a diminished number for inflation… prices are going up faster than the official inflation rate.

    2) We are told of the importance of the boomer demographic, but the bulk of boomers are dependent on the extremely low interest rate for income, fearing the bubbles in housing, bond and stock markets.Spending will contract in this group and larger numbers will be pushed into the old age pension, providing more impost to the Budget.
    3) The postponed festering of the GFC/Sovereign Debt Crisis is ignored.

    Too much of nothing makes a man feel ill at ease.

      • Will funds in the cash component of a superannueation fund managed by a bank owned fund manager like First State be exempt from bail in?

        Will the government/APRA look through the super fund to the owner of the funds?

        Will the deposits of the owner up to say $500k in aggregate including the super amount managed by FS be exempt from bail in?

        Who knows the answer to this?

      • Explorer,

        I don’t know the answers to any of that. Haven’t been able to find any actual details of the “resolution” regime, Australian version, though I confess I’ve not taken the time to wade through all of APRA’s and Treasury’s publications (including/especially correspondence with the banks, to get their ok, of course) for some time now.

        I imagine if there are clues to be found, rather than the whole thing kept under a veil of secrecy, they would turn up here —



        EDIT: I’d also suggest there’s multiple possibilities to consider here; the G20/FSB “resolution” regime viz bank depositor bail-in may well not impact on super, but then, there is also the matter of the growing elitist hints of a 10% “wealth tax” (ie, biblical tithe, to the priest tribe) that could conceivably raid super holdings.

      • Thanks very much Opinion8red.
        I guess they can’t make a big announcement about the establishment of the bail-in facility, because it may cause a run on the banks.

        Vern Gowdie, the family wealth advisor with the Daily Reckoning has advised his clients to be 100% in bank deposits.
        Every time I send an email to Vern Gowdie questioning the safety/danger of this advice due to APRA’s bail-ins, he just chooses to ignore me.Perhaps for legal reasons he has decided to protect his advice by saying that he didn’t know anything about it.

      • I guess the only safety is :
        # withdrawing cash from the bank and depositing it in a vault outside the banking industry
        # buying physical gold/silver and holding it in a vault outside the banking industry
        # buying shares in gold miners

        Buying government bonds is troublesome because of negative real interest rate, residential property is a bubble and not liquid in depressionary times, and the general share market outside commodities is a bubble.

      • Athalone,

        “I guess they can’t make a big announcement about the establishment of the bail-in facility, because it may cause a run on the banks.”


        This deliberate concealment of the bank deposits bail-in regime — to avoid bank runs — is expressly referenced and encouraged in the IMF’s Nov 2012 Technical Note to the Australian authorities, viz the Financial Safety Net and Crisis Management Framework:

        “Past simulation exercises revealed the need for legislative changes to prevent premature disclosure of sensitive information. Australia’s securities disclosure regime requires, for the protection of investors, immediate and continuous disclosure of information that could reasonably be expected to have a material effect on the price or value of an ADI’s securities. There is a high probability that any resolution or crisis response measures will impact the price or value of an authorized deposit-taking institution’s (ADI’s) securities.

        Poor coordination of compliance with the disclosure requirements, timing of resolution or crisis response actions, and the overall public communication strategy regarding these actions could pose risks to financial stability (e.g., through depositor runs) or thwart resolution actions (e.g., through the stripping of the ADI’s assets by insiders) or cause market disruptions. Legislative changes that reduce tension between investor protection and financial stability should be pursued.”


        Gotta love the Orwellian “reduce tension” descriptor.

      • Opinion8red, thanks again for your help…I take this stuff very seriously.
        67% of our super is already in physical gold and silver.
        Think I’ll start taking the unbelievably cheap PM securities more seriously.
        As interest rates go further down to complete the destruction of capital, the opportunity cost of holding PMs is less of a worry.
        Richard Russell has recently gone all in PMs with just 6 months cash holdings.

      • Athalone, may I ask how one is able to assign super to physical PM’s?

        No need to detail if you’d prefer — I’m just curious. Have frankly long since given up on ever seeing a cent of my own super; the govt-usurer nexus will have stolen it long before I ever get to retirement age.

      • @Opinion8red

        About PMs in super.
        We have our own super fund.
        We buy gold & silver from Australian Bullion Company(NSW) (Sydney & Perth)either by phone or internet.
        They transfer it to Custodian Vaults (sister company) for storage where you sign for it and you place it in your leased box(es).
        Have been with these people for 4 years now… And have great trust in them…cannot fault them.
        Paperwork is straight forward…accountant usually scratches his head about the need for it…
        I personally feel much safer… Started looking into it in 2006, and finally made the plunge in Jan 2011 after previously having PM shares.

  2. GunnamattaMEMBER

    I dont actually see anything in there (not that I expected I would) pointing to a serious address of the Growth straightjacket you wrote so articulately about last week.

    Sure there is the infrastructure spend, which will be useful in maintaining aggregate demand in the short term, but nothing making moves on us having a more competitive global position or from hoping that the Chinese continue to buy our ore, with a boost from gas in a couple of years.

    The medical research spending, which I do think a positive step in some ways, seems to me to be structured in such a way as to ensure that we will have a range of major pharmaceuticals researchers fulfilling much the same role in the economy that our carmakers have done up until now. At least in choosing a favourite in the medical research world they are at least picking up a value adding sector which has stood up reasonably OK in recent years. I would expect that big global pharmas will want a further dilution of the bad example set by Australias pharmaceutical benefits scheme before they commit large research funds here.

    The removal of the caps on University courses will mean that presumably we get a load of astronomically priced courses from the G8 Universities in prestige areas, and umpteen zillion budget courses in things like marketing.

    So that leaves the national economy continuing to grind out positive nominal growth which feels pretty tough for many, and an economy at risk of a major shock if the China economy slumps faster than expected, or if global demand doesnt pick up.

    • Yes, that’s about right. Though you could argue that making most of the cuts in welfare advantages the productive parts of the economy. Recycling GP payments into a Medical Research Fund is an example of productive redistriubtion (though it’s a bit odd given the Government’s commitment to ending corporate welfare!).

      The same will help prevent rate rises too so should take some heat off the dollar.

      A little loosening of the straight jacket.

      • migtronixMEMBER

        Yeah right take heat off the dollar, that’ll happen…
        It’s a neo-lib / 3d1k wet dream! The AUD casino is open for binezzz!

      • Though you could argue that making most of the cuts in welfare advantages the productive parts of the economy

        I disagree. Increasing university costs is only going to further disincentivise people from studying the STEM careers, which are often the most expensive, hollowing out the intellectual capacity of this nation, reducing international competitiveness and further reinforcing the ‘houses and holes’ meme. Australian students already pay among the highest fees in the OECD for tertiary level education.

      • migtronixMEMBER

        @jason but haven’t you heard? If you want to learn a trade you too can now get into debt! Sieg Heil Australia welcome to the first day of the rest of your life.

      • Yeah mig, it won’t be long before 4-year olds will become personally responsible for loans for pre-school.

    • migtronixMEMBER

      Medical research is another is a boomer catch line, they will not be focusing on childhood desiases let’s put it that way…

      • Lighter Fluid

        Mig, I, along with many others in Australia, work on discovering new drugs for Malaria – which I assure you is not an old-person disease.

        All our current funding comes from the NHMRC (to whom the fund proceeds will flow), and it is the same for most of the research groups I know.
        The same could be said for those working in this country on Aids, TB, Influenza, and any other infectious disease.

        While a fair chunk of NHMRC funding goes towards rich, old-people problems like heart disease, Alzheimer’s and dementia, there is a very sizeable research community in this country who work on neglected diseases that predominantly affect the young, and who are directly funded by the NHMRC.
        They too will benefit from increased funding.

      • migtronixMEMBER

        @lighter get back to me when your funding goes up to the point you’re not using spreadsheets. Everyone knows you guys will be onside that’s what the AMA is banking on, you’ve been neglected for so long. How much would distributing mosquito nets cost? Any idea? Didn’t think so.

      • Lighter Fluid

        The Roll Back Malaria partnership estimates annual costs of $1.7b between 2010 and 2020 for insecticide treated bed-nets alone, and a total estimated cost of $5.1b a year:
        Total annual funding for malaria was estimated at $2.5b in 2012 (WHO World malaria report 2013), and has been on a downwards trajectory since 2007. So there’s a funding gap of about a $2.6b a year.

    • Gunna, with the way policy has been deliberately skewed (see rise in retirement age and employment/unemployment benefits), I won’t be surprised if most of the medical research funding goes into Geriatric care – after decades of gluttony and laziness, the baby boomers have to be kept alive in order to enjoy their post-retirement ponzi wealth.

      • GunnamattaMEMBER

        Mav, I didnt for a second think the medical research we will do here (which we already do) would focus on anything other than developed world diseases and aged care – diabetes, coronary and circulation issues, weight related conditions, ageing per se, and a range of common cancers. They are, in terms of potential returns, the holy grail.

      • Don’t worry Mav, the pharmaceutical companies will find a way to get grants for gluttony and laziness, bitterness and envy. 😀

      • migtronixMEMBER

        Sorry atha but not so, if the pharmaceutical industry discover a cure for greed they’d wipe themselves out. Remember nobody wants a cure, they want to “manage” the disease and keep giving you drugs, for a totally fair price of course, for the rest of your paying ability – then Tchau!

      • casewithscience

        I think you all miss the point of the MRF. It will do a lot of front line work, which means that researchers won’t have to sell their souls (and their patents) to pharma at the upstream. Also, it appears that MRF may allow for commercialisation, which is good because pretty much no private industry does this in pharma without US money in support (and with US money, you get very unfair IP terms, they are quite skilled at screwing us over). The MRF may just give us that little boost needed to get off the St Louis drip, and finally have a profitable medical goods sector (no offence to Cochlear and Cook).

      • migtronixMEMBER


        Bullshit!!!! I work in health innovation and I promise you all this Fund BS will do is allow for the purchase of US made goodies.

        You’re in dreamland, the Liberals have shown 0 propensity to engage in research backing for the last 6 months and supposedly they turn it all around now?!?! F#&k Off.

  3. Falling particpation rate (65.1 to 64.5) and higher unemployment (5.6 to 6.25) but with higher growth (4.75%), all at the time the car industry is shuttering and the mining capex and employment is in freefall over the cliff.

    Tell me about the million new jobs again Mr Abbott.

    On second thoughts don’t bother because you are now a proven liar, liar, liar, liar liar about things absolutely within your control.

    • Mark Out West


      Holden & Ford have posted near $1B in losses, so lets see whether their 5 year plan is scaled back to a 2/3 and the associated jobs blow the budget unemployment assumptions out of the water. Unemployment to 7.15%

      The we only have to wait to have the new pharma come on stream in 2050/55.

  4. The cuts to previously expected total net (ie Feds and States) spending increases in health and education are likely to cause states to demand an increase in the GST.

    So I see a futher increase in regressive taxation on families as a likely outcome within 4 years, or we could just make the deficit levy permanent, but the revenue generated is far too small.

  5. notsofastMEMBER

    I expect tying the old aged Pension to increases in inflation from 2017 rather than average weekly earnings will in future benefit pensioners. Because I suspect in the not too distant future inflation is going to be greater than rises in average weekly earnings.