Why the outlook for investors is improving

Around the world, fiscal policy is doing more than ever before to support jobs and to raise spending.

As the federal budget recedes into the distance as a news event, it is worth keeping in mind that the week of the budget saw the strongest gains in Australian shares since April.

Of course, other influences were at work, including the positive lead from US share prices despite that nation’s quirky politics. And for some time there’d been a developing view that economic conditions were “less worse” than market participants, the Reserve Bank and Treasury had earlier expected.

But the general reaction of investors is that the budget will have favourable effects on the Australian economy in these difficult times — a view supported also in the latest reading of consumer confidence, which rose by 11 per cent to its highest level since July 2018.

Investors who, in the gloomy times, adopted — and stayed with — “averaging in” strategies for share purchases have done well.

Seemingly, investors are unconvinced by the oft-made criticisms that the tax cuts will fail to lift the economy out of recession and that the projected $1 trillion of gross borrowing will cruel the economy for decades.

In my view, the balance of probabilities is that, despite many risks and uncertainties, the pandemic-induced global recession will end sooner than is generally expected, and the budget will contribute to Australia’s economic rebound.

Here is a summary of the main building blocks in that assessment. 

The budget warns about the “substantial uncertainties” in the future course of the global numbers of infections and deaths from COVID-19. It assumes there’ll be a “progressive lifting” in lockdowns and border restrictions within Australia and for a vaccination to be available by late 2021 — assumptions which could, of course, turn out to be too optimistic.

Around the world, fiscal policy is doing more than ever before to support jobs and to raise spending. Australia has a highly stimulative setting in its fiscal policy and will likely extend it further should the economic recovery be at risk from a “budget cliff-face” as major programs are ended.

Also, the Australian government may have a fiscal card up its sleeve from the assumption the iron ore price will average $US55 a tonne over the forecast years, well below its recent level of $US120.

 Fiscal largesse seems to boosting retail spending in the US, Europe and Australia, at a time when monetary authorities have little ammunition left. With cash rates (and some bond yields) currently pegged at near-zero levels, and maybe not raised for two to three years, governments will for a time find it easy to obtain even long-dated funding at cheap rates.

 One very big question in the local economy is: will tax cuts raise spending?

Many commentators claim higher unemployment benefits would do more to reduce poverty and boost spending in Australia than the “crisis tax cuts” to people and businesses.

With a top marginal tax rate of 45 per cent plus Medicare levy, and with a low income tax offset maintained, Australia will still have a highly progressive income tax structure; and consumer spending is likely to increase further as lockdowns and border restrictions are relaxed. In my view, too, the flatter and lower tax rate on middle income groups legislated for 2024 will be a worthwhile structural change, as experiences in New Zealand and Singapore show.

The scale of tax benefits to businesses undertaking capital spending should soon garner a useful response, though it won’t save many of the companies whose revenues collapsed when the recession hit.

Meanwhile, the budget doesn’t go as far as many people wanted in raising the JobSeeker allowance or in funding child care and aged support. I wonder whether increased benefits for unemployed people could be tied to beneficiaries in good health acquiring new skills for work or doing some part-time work with local councils?

Similarly, might Labor’s promise to extend child care to families with incomes up to $530,000 a year (from the present cap of $350,000) turn out to be highly expensive and threaten the acceptance of means testing in other social security programs?

Don Stammer is an adviser to Stanford Brown Financial Advisers. The views expressed are his alone