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Will Australia’s strengthening budget cause a bull share market?

It’s been a common theme for western countries to run budget deficits ever since the GFC. The lowering interest rate might be helping reduce the interest charge, but the total amount of debt on the national balance sheets is getting bigger every year.

The Australian Finance Department released figures today showing that the Australian Federal budget has improved by nearly $10 billion in two months. This improvement was generated by both higher than expected revenue and lower expenses.

Revenue was expected to be $282.7 billion and came in at $289.2 billion, $6.5 billion better off for the year to date. Expenses were expected to be $307.8 billion but it was actually ‘only’ $304.5 billion, which is $3.3 billion better off.

Of course, this still means that the Federal budget’s net operating balance was $15.3 billion in the red, but the improvement is a good sign.

The increase in revenue was apparently due to increasing corporate taxes and a rise in resource prices. Every investor knows that resource prices are not guaranteed, so what is a boost this year could be a negative next year. There is talk of both political parties wanting to use this boost to fund tax cuts and other vote-gaining tactics. That’s the problem with such short election – both sides are constantly trying to get re-elected instead of doing what’s best for the country.

Norway has built a gigantic sovereign wealth fund from its resource gains, which should last indefinitely. If Australia is able to reach a budget surplus quicker, I wish our politicians would do something like that instead.

Either way, an improving Federal position is a good thing for our country and could lead to optimism in the stock market. GDP growth has always been a positive for the banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC).

If the government do pass on tax cuts, I’m sure Turnbull and Morrison will be hoping people go and spend their extra money. This could be a boost to Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).

Foolish takeaway

Whatever happens, if our Federal finance position is getting better then that’s a good step closer to the budget balancing again. It’s better than things getting worse. It’s good to see positive news like this on a day where the Trump administration seems to be trying to cause a global downturn.

If Australia is getting stronger then these top stocks could benefit greatly.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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