I'm glad you asked.
Oh, you didn't? You might be the only one. I've been asked (and asked and asked) over the last day and a half.
And… I have some thoughts.
But first, I want to get to the ongoing argument about inflation.
Will this Budget be inflationary?
Before I answer, though, I want to make a point I've heard very few people actually make.
See, they let the questioner define the parameters of the answer.
So, we have people twisting themselves in knots.
Instead, the question from an impartial, genuinely curious interlocutor should be split in two:
1. Is this budget likely to be inflationary; and, if so…
2. Is the risk worth it, given the policy outcomes.
See, I've heard almost no-one, including the Treasurer, address the latter.
He, and his supporters, have chosen to simply argue the toss on Question 1.
So, let's engage with that question.
We have a Budget that has a small surplus (i.e. tax receipts were greater than government expenses), driven mostly by commodity price gains (and most of those gains have come from exports).
Without that unexpected boost, it would have been a deficit Budget, with expenses outstripping revenues.
So… when a Budget remains essentially in deficit (deficits are predicted for each of the next four years, too), it's stimulatory. And a stimulatory Budget boosts demand. In the absence of a commensurate increase in supply, that — by definition (or, more prosaically, as we learned in Year 8 Commerce) — will put upward pressure on prices.
Now, the government then decided to spend a chunk of the unexpected boost to revenues. That's also adding demand, relative to what would have happened, had they not unveiled new spending measures. And that also puts upward pressure on prices.
Those things are, other than among the political partisans, pretty unquestionable, on the logic (which, unusually among public debate, is what I like to try to base my arguments on).
I think the Treasurer actually does himself a disservice trying to tie himself in knots denying it.
Sure, if he said 'Yep, it does risk inflationary pressures' he'd be attacked by his opponents.
But then if he followed it up with '… but we think that's a very reasonable risk to take because our policies are fair, decent and necessary' (or whatever rationale he wanted to bring to the table), it'd improve the quality of our public debate, and move the simplistic questioning past one single metric.
Don't get me wrong: inflation is very important right now. If it continues, it'll overwhelm even the new spending initiatives when it comes to the impact on all Australians' standard of living.
But, again, that's the conversation we should be having… not just whether it might, possibly, risk making inflation a bit worse.
We definitely should have an honest conversation about inflation… just not only inflation.
The same, by the way, applies to the overall Budget balance. My greatest relief, economically speaking, is that the Treasurer resisted the urge to splurge even more of the unexpected gains. My greatest frustration – again, economically-speaking – is that he did essentially nothing to fix the structural imbalance… and worse, left policies in place that will make that imbalance worse over time.
But that's probably the greatest characterisation of this Budget. I've called it a 'potholes' Budget – it's like the Treasurer (constrained, no doubt by our economic challenges) realised that, with a couple of exceptions, it wasn't a time for big, new projects, but a time to fill in the potholes that he felt the previous government had left behind.
Money for health, a good move. Some money to offset higher energy prices and welfare improvements (also, in my view, justified) and a couple of other 'bits and pieces'. Important bits and pieces for those who will benefit, to be sure, but nothing grand or 'signature' about this one.
I've written before about what I think the government needs to do, to both take pressure off the RBA and to fix the fundamental problems of a budget that is skewed too far into deficit. So I won't redo them here. But those things haven't been addressed.
Bottom line? Probably a B+. Not as much as I would have liked, but more restraint than he might have shown. The latter bumping the rating up a notch or two.
(And for the partisans on both sides, the last government left the structural deficit behind, so they don't have much of a basis to complain, either. He was left with a Budget in poor shape, and did too little to fix that. Blame on both sides.)
My biggest gripe, other than the fiscal balance? I don't have an issue with sin taxes, per se – there's sound logic in taxing things you want less of. But the decision to put up the tobacco excise by 5% per year – plus inflation – over the next three years is getting close to cruel. If you can't give up the cancer sticks at current prices, I'm not sure you'll be able to at any price. And so it kinda goes from 'sin tax' to 'extortion' at some point. (I'm not a smoker, by the way. And, such is the falling rate these days, I don't know any, either. It just seems pretty rugged.)
As for investors, this was the least impactful Budget I can remember in a very long time. There was almost nothing that would meaningfully change the outlook for any company on the ASX.
Which, given everything else going on in the economic world right now, is probably more a relief than anything. And it's very much in keeping with what's a 'don't scare the horses' Budget.
The biggest impact for investors, then, is the long term outlook. Which, frankly, it always is, even though the attention is paid to the short-term and company specific impacts when announcements are made.
As much as some people fret about company tax rates, or changes to rules and regulations, I think that misses the point. The greatest impact on our long term wealth creation, at an economy-wide level, is going to be the health and growth of the economy, not fiddling with taxes, or minimum wages, or (almost) anything else.
To be sure, some companies are impacted more than others by those little changes, but over time, the sheer impact of compounding will dwarf them all. It's why, as much as we'd all like to pay less tax, I'm far more focused on how policies will impact the opportunity for the economy to grow, healthily, over the long term.
Because that, I'm convinced, is how the real money is most likely to be made. In a big way.
(Oh, and please read today's PS!)
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