Yesterday, the Australian Government announced an $86 billion budget deficit. Just 12 months ago the government was forecasting a $5 billion budget surplus in FY20.
Well, the coronavirus pandemic has hammered ASX shares lower and thrown those plans out of whack.
Let's unpack Treasurer Josh Frydenberg's budget update and what it means for your favourite ASX shares in 2020.
What were the key budget takeaways?
To be honest, it makes for some grim reading. The government's deficit for FY20 is forecast to be $85.8 billion. That's a big turnaround from a forecast $5 billion surplus in the pre-pandemic world.
Not only that but the FY21 deficit is forecast to grow to $184.5 billion the following year. These are some big numbers that reflect both a slowdown in government revenue (i.e. taxes) and increase in government expenditure.
The unemployment rate is expected to hit 9.25% by Christmas, despite an extension of the JobKeeper program, and Australia's net debt is forecast to reach $677.1 billion by the end of June 2021, or 35.7% of GDP.
It's important to note that budget deficits are not necessarily a bad thing. In fact, more government spending and strong fiscal policy can help drive economic growth. There's been an obsession with surpluses over the last decade or so but budget deficits can actually be good for ASX shares and the economy.
What does all of this mean for ASX shares?
I don't think there's much good news for hard-hit industries like travel or hospitality in the budget update. Treasury is forecasting an easing of border restrictions by January but that seems very optimistic. That would be good for travel shares like Webjet Limited (ASX: WEB), but also residential REITs like Stockland Corporation Ltd (ASX: SGP), both of which benefit from immigration. However, that forecast appears at odds with what we're seeing in the market, so I'd take it with a grain of salt.
I think infrastructure could be one sector that benefits from the current conditions. The pandemic has forced a re-think of working and living arrangements. It's also given cities a chance to see how impact well-planned infrastructure is for everyday life.
More government infrastructure spending seems like a real possibility to boost economic growth. Multi-billion-dollar government contracts provide: a) big dollars, and b) reliable work for chosen companies.
That could boost economic activity and future-proof our cities, which could in turn help boost ASX infrastructure shares higher. If that's the case, I'd be watching Transurban Group (ASX: TCL) and Atlas Arteria Group (ASX: ALX) shares in 2020.
In the end, much of the impact of the budget deficit on ASX shares will really come down to how the ballooning government debt will be deployed.
