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The Budget verdict, without the politics

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Well, you can’t say they didn’t try, with last night’s Federal Budget.

They threw the kitchen sink at it.

And the plumbing.

Most of the plates, knives, forks and spoons.

Plus a couple of rolling pins, an egg whisk and that electric juicer you only used once and that’s been in the corner cupboard for 13 years.

The Budget deficit will be more than $200 billion.

Gross government debt will top $1.5 trillion in a few years.

For a government that was worried about a ‘debt and deficit disaster’, and a party that decried the Rudd/Swan GFC ‘cash splash’ they certainly got religion… and fast.

Which is to their credit.

Unchecked, this pandemic was going to rival the Great Depression for economic impact.

They acted, slow at first, but with improving haste. And they’ve continued to do it. 

“Whatever it takes”, first made popular by European Central Banker ‘Super’ Mario Draghi, is now the mantra of almost every Central Banker and Treasurer the world over.

They certainly got the quantum right. Less certain is the impact of the money being spent.

(And a short aside, here. Some have counselled me to avoid talking about the big issues, for fear they be seen – or taken – as party-political commentary. I’ve politely declined that suggestion. Some of you will love some of what I have to say, if it agrees with your politics. Some of you will hate it, for the opposite reason. And then I’ll change tack, and lose the other half! It’s not a very good way to amass a Twitter following, that’s for sure. But, because I think you deserve to hear it, I’ll share my honest thoughts, regardless of which party’s views it happens to coincide with, at the time. I’ll trust you, our valued members and readers, to stick with me, and to keep an open mind. I don’t expect anyone to agree with everything I say, but we can disagree in good faith, right?)

The government has abandoned a key plank of its ideology by allowing itself to max out the national credit card. That’s all to the good.

But they’ve stuck – hard – to the ideology that, broadly, can be characterised as ‘smaller government’ and ‘business first’.

If the idea of ‘smaller government’ and ‘$200 billion deficit’ seem strange in the same breath, welcome to 2020.

In this case, the smaller government I’m talking about is the willing reduction of tax revenues as the primary tool of stimulus (as opposed to increased expenditures).

Business ‘carry back losses’ tax deductions, immediate tax deductions for all purchases, and sweeping personal tax cuts are the centrepieces of this budget.

Each reduces the tax take. And each, the government hopes, will boost economic activity.

Yes, there are also some additional spending increases, but this is a ‘shrink to greatness’ Budget first and foremost.

Treasurer Frydenberg is hoping that putting extra cash into business coffers will lead to increased employment and investment spending.

More apprentices, more general staff, more cars, more machines.

If he’s right, the money will get pumped around the economy, creating economic activity and leading to increasing numbers of jobs – directly as those employers hire, and indirectly as the car yard, the machine shop and the local cafe benefit from money those businesses spend.

The problem, however the stimulus is directed, is confidence.

If I’m feeling scared, I’m going to keep every dollar I can, putting it away for a rainy day.

If I’m optimistic, I’m going to spend my windfall, comfortable that better times are coming.

Will business owners really take on new staff, if they can’t be sure the customers will come?

Will those ‘carry back’ deductions be reinvested in new machines if the boss is worried the customers won’t come? 

Or will the cash go into the owners’ bank accounts?

Time will tell.

I do have a couple of issues with this Budget.

Or, less combatively, things I would have done differently.

It’s a brave commentator who tells people they shouldn’t get their promised tax cuts, but here I go:

In the midst of the mining boom, then-Treasurer Peter Costello used the temporary revenue boost to give us permanent tax cuts – a move that plunged the Budget into a long-term structural deficit.

I worry that these tax cuts will be similar – solving a temporary (though serious) problem, with a permanent solution.

It’s, in part, why this debt will be generational. There’s no ‘swing back to surplus’ because the ‘stimulus’ never goes away.

I think that’s a mistake.

(Yes, yes, we can argue about the ‘right’ level of personal and business taxation, but that has to come with an argument about the ‘right’ level of spending, too. This budget doesn’t do that.)

My second beef with the Treasurer is the way the stimulus is being spent. I’m pro-business and pro-capitalism. It is, to misquote Churchill, the worst system, except for all the others.

But I suspect that, ideology aside, the best way to stimulate the economy is to put money in the hands of those who’ll frequent those businesses, rather than directly to the companies themselves.

And – even harder for the government to hear – the stimulus is suboptimally targeted because we could have either had a greater impact with the same cash – or the same impact with lower spending – if they’d let the maths play out.

See, no-one will knock back a tax cut. Or a handout.

But if I gave you a $1,000 budget and asked you to create maximum economic activity (i.e. stimulus) with it, what would you do?

Sure, you could give it to Twiggy or James Packer. They’d trouser it, and almost none of it would go into the economy. That’s no criticism of either man, by the way, just the reality that their spending behaviour won’t change one iota, whether or not they get my $1,000 cheque.

What about the Bank CEO on $3 million? Or the lawyer on $250,000? Maybe some of that goes into the economy. There might be one or two of them who’ve levered up on houses and cars, and whose lifestyle exceeds their resources. But on average, the extra $1,000 given to a high income earner won’t help much. Maybe a couple of them buy a new telly or fridge. But I’d guess they’d save or invest most of it.

And so on, down the income scales. 

The maths, though unpalatable for some, is simple: the less you earn, the more likely you are to spend whatever stimulus cheque you get.

So, it follows that if I wanted to do the most good with the least amount of money, I’d target the stimulus to those most likely to spend it.

That’s a tough pill to swallow if you see welfare recipients as bludgers or low-income earners as people who just don’t try hard enough.

(I think that’s a jaundiced view, by the way, but it’s genuinely held by many.)

It’s maddening if you’re a NSW emergency services worker, for example, who’s been denied a 2.5% pay rise even as money is splashed almost literally everywhere else.

But, objectively, it’s the most economically responsible thing to do with the government purse.

(And those workers should get a pay rise too – it needn’t be either/or!)

And investors?

Well, in the short-medium term, shareholders should feel like yesterday was Christmas. Almost all of us will pay less tax, as will many companies. And many companies will get generous government handouts for carry-back losses, hiring apprentices and hiring young people, as well as immediate tax deductions for buying new business assets.

There’s nothing not to like, purely from that lens.

Of course, that matters little, compared to how quickly (or otherwise) we get out of recession.

Investors are trained to look at the here and now when it comes to economic policy. And fair enough.

But, as long term investors, it’s the long term that counts.

And what matters over that timeframe is not how much cash companies get in 2020, but how robust the economy is, how strongly we grow, and how prosperous the country becomes.

That’s what I’m hoping the government has got right.

The bottom line? 

The PM and Treasurer get top marks for responding with scale and haste. They deserve credit for not trying to ‘nickel and dime’ the recovery.

They lose a couple of points, in my book, for wasting some of that money that otherwise could have created more economic benefit.

And they lose a few more for creating a structural budget deficit that will likely be with us for decades. I pity the future Treasurer who has to unscramble this deficit egg. I’m not entirely sure any of them will ever have the political capital to tell us we need to pay more tax, or to drastically cut services.

Overall, it’s a B+ from me.

And, because we’re all in this together, I hope my fears are unfounded. If the government has got this wrong, we’ll all pay.

Fool on!

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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