The Australia Budget is fixed! Via the AFR:
…At the end of February, revenue for the first eight months of the 2017-18 financial year was $6.5 billion higher than anticipated in the mid-year update just before Christmas. At the same time, expenses were below expectations to the tune of $3.3 billion.
The fast-improving fiscal position is being driven by last year’s jump in commodity prices, a surge in corporate earnings, and 2017’s record 400,000 jobs boom, which is not only inflating income tax receipts but has sharply reduced the welfare burden.
Taxes on incomes are ahead of schedule by $1.3 billion, at $128.5 billion while company taxes are ahead of the MYEFO forecast by $3 billion.
Spending from July through February has averaged $38.1 billion a month, according to the department figures. MYEFO anticipated a monthly spending rate of $38.9 billion.
This windfall, for that is what it is, is driven overwhelmingly by commodity prices that have been far higher than the Budget outlook. In turn that is the result of China’s post-2015 stimulus. Lost on everyone is that stimulus is over and the terms of trade are falling again. The trigger may be the Trump tariff panic but the underlying driver is a slowing China.
There is only one sensible way to view the two year windfall. It ought to be saved in the national interest. The business cycle is clearly aged and a new shock is foreseeable (indeed may be underway). As well, the Banking Royal Commission is exposing a control fraud of corrupt lending that will make the next shakeout very difficult.
So what is Canberra doing? The opposite.
On the Fake Right (supposed to be about markets not business) a corporate lobby is in a full court press for a tax cut that will only benefit foreign shareholders and executive bonuses. It won’t add to growth. It won’t boost wages. It will create a little capital management and a giant $8bn structural deficit that will need to be filled by tax hikes elsewhere over time.
Astonishingly, the legislative branch of the corporations, the Coalition, is prepared to do this even though its will put the sovereign rating in jeopardy shifting into 2019. This could well converge with end-of-cycle dynamics to send your mortgage rate up during the next shock.
Canberra’s Fake Left (supposed to be about workers not wowsers) is a little better but not much. It is steered by a union movement that wants to turn back the clock on industrial relations to boost wages while supporting a “massive” immigration supply shock (so defined by UBS). This is a hopelessly conflicted policy position that places macroeconomic and microeconomic in complete contradiction.
Astonishingly, the legislative branch of the unions, the Labor Party, is mulling boosting immigration even higher to the accelerating detriment of living standards across every service you can name.
Between the two are collapsing minor parties that have no national interest consciousness:
- Xenophon’s offshoots are pokie-bashing property developers;
- the Greens are so lost in a “giant Australia” population platform that it is possibly the most environmentally destructive of any party, and
- a racist phony in One Nation that operates in an easily manipulated soup of battler versus bludger false binaries.
Nor is the executive any better. The Canberra ship of fools is sailing under the a deluded economic guidance of the RBA and Treasury whose Australian “ futureboom” would survive a collision with an epoch-ending asteroid.
So, in the interests of public policy, here is what is coming. Assuming we only see the already baked-in China slowdown and not some wider shock, iron ore will average $50 in H2 and coking coal $140. The terms of trade will fall by 17% or more from the Chinese stimulus peaks though 2018/19:
This versus the Budget outlook that sees the terms of trade falling -2% in 2017/18 and -5% in 2018/19. It’s going to miss big. We know the rest from the recent past: nominal growth is going to slump and the income recession will return for corporate profits and households.
No party in Canberra has policy positions based upon this reality. Indeed, it’s almost as if all policy is consciously designed to make the coming adjustment as bad as it can possibly be.
Position yourself however you like for these things, but as you do, remember that Canberra and its various offshoots is doing the complete opposite. They have set course for a fight over the scraps of Australia’s dying economic model and are putting your country comprehensively last.
