A quick rant on the Australian budget

I wanted to talk about the Australian budget. I’m not seeing what the admirers are seeing. At first, I was worried that I’d missed something. But yesterday’s dovish speech by Governor Lowe suggests the Reserve Bank are seeing exactly the same thing I am.

Four months ago, I wrote what good government stimulus would look like. This budget didn’t tick many boxes. Don’t get me wrong, the fiscal cannon is large enough to help. There is enough ammunition loaded into the cannon. But, it has been pointed in the wrong direction. Which means it will likely need to be fired again within the next 12 months.

Supply Side or Demand Side?

The budget has a huge focus on supply-side support. Supply is not the problem! Everyone has spare capacity. Demand is weak and needs help, not supply.

Giving money to companies to hire more workers when the existing workers are not at full capacity is not going to help. Giving companies tax credits to buy new equipment doesn’t help if the old equipment is running at 60% capacity. 

We don’t manufacture in Australia anymore 

So why do we want to give tax credits to companies to spend on capital? This expenditure will be heading directly offshore, helping other countries.

Global manufacturing comparison % GDP

$30b on company tax incentives and another $1.5b on a Modern Manufacturing Strategy is a noble endeavour. But that money is going to buy Chinese, Japanese and US robots. I’m sure those countries will be grateful for the demand. Australian taxpayer-funded stimulus payments should really be targeted to support Australian jobs.

Isn’t an increase in capital expenditure going to reduce employment?

Some companies do have a good reason to spend on capital. The reason is to automate processes so that they can reduce staff. 

This is not really what the government should be going for when staring down the barrel of the highest underemployment stats of the last 90 years.

Australian budget fiscal cliff

The drop off in spending is really (really) large from Q3 to Q4. In Q3, government (and superannuation drawdown) support was over $100b. In Q4 it looks like being almost 70% lower. Q1 of 2021 will be 70% lower than Q4. 

COVID is looking increasingly like a marathon. Australia came out of the gates sprinting, we’ve now dropped to slow to a walk. In three months’ time, it will be a crawl. 

The insolvencies haven’t happened yet. Another wave of infections is hitting Europe and the US. Demand has not recovered, even in largely virus-free countries. It is too early to congratulate ourselves on a job well done.  

Where is the budget support for structural change?

The Australian economy was heavily reliant on education, tourism and population growth. None of those will return quickly. 

So, you would think there are two choices:

  1. support the workers until those industries return
  2. help the workers get new jobs in other sectors.

I’m not sure which policies are designed to do either. There are some token amounts. But I’m not expecting the average (former) waiter or airline stewardess to transition seamlessly into a robotics role as part of a Modern Manufacturing Strategy.   

The paradox of thrift

On one hand, the Australian budget takes away money from those on JobKeeper and JobSeeker who are most likely to spend the money.

On the other, it gives tax cuts to higher-income earners who are likely to save it.

I’m not going to argue the social case for or against. But the economic case is that already weak demand is about to be dealt another blow.

Net effect: 

  • Massive fiscal cannon, lots of ammo, aimed in the wrong direction.
  • Expect the Reserve Bank to need to do more to make up for the misfire.
  • A supply-side budget without precedent.
  • Not Keynesian. Can’t call it Austrian. It isn’t MMT. It probably wants to be supply-side, but you would have to be an extreme trickle-down adherent to love it. The guiding economic principles are not clear at all.
  • It will give a short term sugar hit, followed by weak recovery, especially for wages.
  • Expect corporate profits to be helped by lower tax rates but hindered by poor sales.
  • Expect the government will need to do more. Hopefully, they will aim better next time.

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

Follow @DamienKlassen on Twitter or Linked In

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Comments

  1. I ave long suggested the instant tax write offs should only be for the purchase of Australian manufactured equipment.

    The problem is it would not allow Tradies to buy a new hilux and write it off…

  2. GunnamattaMEMBER

    I think as the magnitude of the ScoMo Frydenburg budget failure starts to really dawn – and I dont think that will be until circa February – March and the return to normal insolvency laws – there will be another budget where the government will be porking like billyo and tossing ideological baubles out of the budget just in case they never get the chance again. It is that grim.

    He fronts a party which has sown a minefield between its current location and the one at which it wants to be for the next federal election with the bringing down of a budget which has directed whatever economic stimulus it has directed – for a populace with about the worlds largest private debt burden, largely embedded in the worlds most expensive houses, with the worlds most parlous competitive position, and paying the worlds most expensive energy bills  – to those earning more than circa 150k per annum and who represent, as far as the 90% of the electorate is concerned, the 1%, and who can be guaranteed that they will not have anywhere near the same motivation to spend and contribute to aggregate demand, and to further support housing speculation by attracting first home buyers (facing the long flat parched wasteland of deflation and low incomes growth) to backstop current in market housing speculators, while doing nothing about land costs, energy costs, or overall private debt volumes.

    And that 10 year kip the RBA is just awakening from is the the precursor of a new era screaming ‘faaaaaaarrrrrrkkkkkk!’ For Australia.

    Somewhere along the line economics became a belief system rather than a science – and the elites the media the universities and the corporates and bureaucracies have spent a generation burning unbelievers

    • Arthur Schopenhauer

      Before Covid , the Average Aussie income was $80k, while the Median was $56k or thereabouts.
      That tells you everything. The bottom 80% of earners are hanging on to income with their fingernails, while the top 10% are doing very well indeed.

    • I’ve heard it said that modern economists suffer from Physics Envy – the desire for economics to be a ‘natural science‘, when it’s nothing of the sort. Economics is about human action and yet it’s been hijacked by ‘math’ and models, which are being used to both explain and predict human responses to a variety of incentives.

      Yep, beats me too.

      • Lmmao … those B.A. level maths and physics use the very same ex nihilo/synthetic a priori that you ascribe too Dominic … as corner stones to the symbolism that it is represented in. That was the whole idea behind burnishing it with a thin veneer of ***Popular Science Magazine*** Bernays PR in giving it unwarranted gravitas before the unwashed.

        You have no idea how many thick white papers I’ve read and they can all be boiled right down to the same core ex ante axioms you genuflect too. Transference of metaphors from the aforementioned above is a bad case of scientism but you’ll get that when funding skews more rigorous academic application.

    • You last para is a good reflection of what agency has wrought Gunna, albeit I would take issue with the perspective that economics was or ever could be a science E.g. you can not ascribe scientific methodology to the discipline of political theory and that is what economics is with a side of natural history.

      The one thing that does skew that academic pursuit is the mental or emotional tastes of the elites and how its reflected in philanthropy to such endeavors since time immemorial.

  3. The guiding economic principles are not clear at all.

    This. The budget showed our macroeconomic managers to be strategically barren. In fact they don’t believe in macroeconomic strategy full stop. So what we get is a hodgepodge of disjointed policies that roughly correspond to their discredited economic ideology. Times like these you need real economic strategists and unfortunately they only live in the labour party these days.

  4. All fine as far as it goes but how does this affect where you are investing money?
    Does the TFF change the calculus on whether it is worth buying bank shares as they gradually avail themselves of free money courtesy of the government/RBA and dispense with raising more expensive debt in the market?
    What happens when the $200 billion TFF ceiling becomes $400 or $500 billion in 6 or 12 months time?
    Much time is lent outlining the woeful state of affairs in Australia and our woeful government. None of which I disagree with. That said, I would like my money invested based on what is happening and likely to happen in our maladaptive economy rather than on what ought to be happening.

  5. Damien The collapse in manufacturing value added shows that the Garnaut and other free traders’ experiment in Australia did not work. Garnaut said once tariffs were dropped to near zero from the ashes would rise new industry. However, this was an ANU economics department fantasy. I, for one virtually marched against it. There were no economies of scale in Australia and no large market and large distances to other markets and a culture of anti value adding. That is the past. To encourage some value adding, tariffs should be reinstated at a modest level and any newly established enterprise which passes a value adding test should be given a tax and reporting holiday such as given in Germany. In addition every value adding enterprise still left in Australia suffering due to govt regulation, high energy prices etc etc should be vaued and by any means apart from huge govt subsidy retained if possible. Otherwise, the immigration ponzi should be dropped and let the $A find its level and the export credits from Australia’s iron ore, gas, coal , lithium etc can in some method be shared by a relatively small population.

    • Great summary, unfortunately too much truth and common sense in one paragraph for eggheads and politicians to absorb. Whilst in the past I find it extraordinary that Australian governments of both sides of the political divide swallowed the free trade bullshit wholeheartedly and the damage done.

  6. Haywood JablomyMEMBER

    You’re missing nothing Damien. Scomo is a one-trick pony so wedded to his ideology that he cannot comprehend anything other than doing the same things over and over no matter how ineffective. Business business business, tradies, hard working Australians, having a go, best kind of welfare is a job, jobs jobs jobs jobs. That’s before you even get to his corruption at the hands of his wealthy elite handlers.

    As an experienced marketer, he is quick with a response and has an intuition for controlling the narrative, assisted by a compliant and subservient media. His blustering and bullying presence and mannerisms give him a flimsy and undeserved patina of competent leadership, far more than he deserves. He is a master of deflection and of lying with absolute confidence and not a hint of shame. Nothing is ever his fault. None of these could be considered valuable qualities in the leader of a country, yet he possesses little else of substance.

    People seriously need to get their heads around the likelihood that this bloke is actually as dumb as a box of hammers.

    • Is he really a tool or rather a sociopath?

      Compelling evidence would lean me toward the latter.

      The amount of human suffering they have imposed on our people (on segments of our people) can’t just be accidental. Even throwing darts your policies would not have been so cruel on average.

      His need for an empathy coach – to better fake some kind of humanity. And as Murdoch’s man he has a constant stream of protection/mansplaining in the MSM, to cover for it. ‘What Scummo really meant by that tantrum was…’

      And the fact right and wrong seem to be foreign concepts to him. The blatant criminality of the LNP is even waking up many sheeple, as calls for a Federal ICAC grow stronger.

      2021 will be an interesting year. With the children at the helm, I fear we’re going to be traveling in circles.

      • Haywood JablomyMEMBER

        I think he’s probably got a bit of both to some extent. In what ratio I have no idea. Add a good dash of being completely out of touch with what the lives of real battlers are like. People who have never had, nor currently have wealth and privilege as a part of their lives can’t comprehend how different are the everyday experiences, thoughts, and belief system of those who have basked in it all their days. Same obliviousness in the other direction for those looking down on the peasants from on high. No idea.

      • All that has been true of the Liberal Party and its policies for the better part of twenty years though. Other than, as noted earlier, apparently being dumber than a box of hammers, there’s not really much different about him.

        It’s a pretty straight line from the Rodent to Scomo, with only a minor deviation through Turnbull.

      • Re whether tool or sp, his pre parliament career and reported behavior would support your view being an sp, I think a more simple view is he isn’t much more than a common garden variety Carnt that floated to the top.

    • I guess I don’t need to read that. The headline says it all.

      Never have I been so glad that at the end of last summer I asked to go part time and therefore become a permanent staff member. Getting $20.54 an hour is not much, but I’ve got guaranteed hours plus paid annual leave and sick leave! How luxurious 🙂 It also gives me protections against being thrown on the middle aged trash heap. So many people are so fcked it isn’t funny. I believe Scummo and Joshie boy will be screaming that life just isn’t fair and drumming their heels on the floor, red in the face from and almighty tantie but some time next year they will FORCED by the cruel hand of fate to increase JobSeeker. I look forward to one of the best schadenfreudgasms of my life when that happens.

    • Haywood JablomyMEMBER

      Indeed. Keep directing money to those hard working business people (who funnily enough rarely amount to much without their workers) and pretend it will trickle, spill, drip, dribble, ooze, leak down to the less industrious souls below.

      Of course what actually happens in Solomon Lewesque style is the money goes straight into the pockets of said businessmen, where it remains wedged as tight as a proverbial pin that can cannot be removed from their sphincter with anything less than a Massey Ferguson.

  7. “Spare capacity”. Oh dear.

    Isn’t the whole point of the business cycle to reduce the spare capacity when demand is not there, rather than produce enough artificial demand to take up the spare capacity? I know it sounds awfully old fashioned (classical economics etc), but spruiking what amounts to ‘bath-tub’ economics … surely we’ve grown out of that by now.

  8. @Damien

    I thought the BIS link I gave summed up the marching orders to the compliant lest one be excommunicated by some rating agency and and suffer an IMF loan ointment.

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