The 2009-2010 Federal Budget Overview

So the 2009-2010 Budget has been released and was there an absolute firestorm in parliament or what ? It was amazing to watch Question Time today and one really wonders how anything is done at all over all the shouting. So all in all, it is clear that the main two words which come out of the budget are “spend” and “debt” – these are the two words that every media outlet and newspaper have smeared all across the front of their websites and papers over the last few days. So what does it all mean ? Well, I have prepared a brief breakdown.

Overview

This budget is all about spending, and spending big. The Governments position on this is that it needs to spend in order to reduce the levels of unemployment across our country and sustain economic growth in the short-term. The Government has proposed around $22 Billion to be spent per:

• $3.4 Billion on roads
• $4.6 Billion on rail
• $3.5 Billion on clean energy
• $3.2 Billion on hospitals
• $2.6 Billion on Universities
• $4.7 Billion on Broadband

The so called – big ticket items – were the significant increase in the aged pension , the tax cuts which were delivered and a new carers payment scheme which was introduced in addition to a paid parental leave scheme. Of course, this was negated by increased taxation on superannuation and a tightening of rules associated with superannuation for higher income earners, increased means testing for middle income earners and the dreaded increase in the pension qualifying age to 67 – ouch. These measures are meant to increase our GDP (Gross Domestic Product) by around 0.75% – or approximately $6 Billion – and lower our unemployment by 1.5% for the 2010 year. The Government has contended that without these measures we would be pushing 10% unemployment.

The Debt

Of course, with all this spending comes the bad news. The Governments deficit will expand to a whopping $57 Billion and will not be eliminated – apparently – until 2015/16. This is based on some highly, highly dubious figures released by the Government of a 4.5% rebound in the economy per annum after the global downturn recovers and remain that way for a number of years. In the last 30 years, we have only had 5 years where the GDP of our country has grown at rates similar to those flagged by the Government and so to suggest that the Governments deficit will rebound by 2015/16 seems highly unlikely – particularly on the basis that we would need around 5 years of consecutive years at this level.

The short-term forecasts seem to be in line with most accepted trending regarding near-term forecasts and are more realistic. Why the Government didn’t just come out with more realistic figures than those proposed – I have no idea – but one assumes to ‘fluff up’ the numbers a bit for their political interests as opposed to tangible reality. While I do by no means suggest that the spending the Government is proposing is not needed, I am just slightly confused as to why the Government doesn’t just provide more quantitative growth figures and sustainable repayments of debt calculations – but read this now – there is no way the proposed debt will be repaid by 2015/16 unless we have record levels of GDP growth for the next 5-6 years after 2010. I will gladly eat my hat if this does happen … and my pants too.

To balance the view, I also think that everyone needs to put Australia in stead with the rest of the world. Our net position will increase significantly but in comparison to other nations around the world – we are very well off. Our debt will peak at 13.8% of GDP in 2013/14 which is significantly lower than many other first world countries in the current recessionary period. My concern is the simply unrealistic medium term policies outlined by the Government to repay the sums of debt they are talking about at a sustainable level. Evidently, whether it is this Government or another – more aggressive fiscal and monetary policies will be need in order to realistically reduce debt levels to those proposed.

The Global Recovery

The Governments forecast for unemployment rises to a maximum of 8.25% by mid 2010 before falling from this point onwards in line with the proposed recovery of the world’s economies and GDP growth onwards after this point. This does seem to be slightly conservative from other industry related reports I have read which seem to flag unemployment reaching slightly higher levels and being sustained into 2011. A very fat dark cloud remains over what will happen post-2011 and from all indications revealed by the Government – Australia will have the best 5-6 years of modern times once the economy has recovered. The current value of the Future Fund is %58.1 Billion as at 31 March 2009 and has fallen by 9.6% over the last 9 months in 2008-09 – another point of concern to watch.

In my mind, it really was reckless of the Government to suggest such figures since it just inflames the political rhetoric between the both parties – instead of focusing on the real issues which affect everyday Australia’s. More importantly, it seems that no one is really fooled by the publishing of unrealistic growth figures and they are discarded by the public anyway – so one has to wonder – why include them?

Financial Markets

The Australian Financial markets seem to react relatively positive to the budget – with the 3-yr and 10-yr bond futures moving higher by around 7 points in the first 30 minutes of trading. This infers that most people were probably surprised that the debt levels were not higher considering the leak that occurred earlier last week. The AUD is currently trading around the 0.76 USD market – which is still quite strong.

Conclusion

While the budget seems to be fairly balanced given the times, the Governments unrealistic assumptions regarding growth seem to cast a shadow over its credibility. Most forecasts predict a very weak and sub par recovery in 2010, and no real rebound until 2011 when the economy will move towards more positive trending. This is based on a number of current factors such as weaker exports, general business sentiment and the overall global economic downturn recovery process simply not being able to respond faster than this. The US and European markets have to recovery and rebound before Australia begins to have more positive trending, and despite our shield from China – it can simply not sustain our entire economy and boost it significantly to the levels the Government is predicting.

As a consequence, this will continue to depress the labour markets in Australia all the way up to the end of 2010 and maybe even into 2011 – I can simply not see any real recovery before this, which seems to be in line with other industry reports and general market sentiment. The RBA’s position, from everything I have read from the reports it has released, seem to reflect genuine concern for the market and I envisage it will continue to stimulate the economy. However, of future concern is that if the Government does continue a stimulatory fiscal policy position into the future once a global recovery rebound occurs – then this is the point to watch for tightening from the RBA to curb any inflationary pressures which will start to appear again in the market.

Perhaps this is a necessary budget – spend now, but pay much more later to save jobs – and really regardless of whether a Labour or Liberal Government was in power – both would be spending in order to ensure job security remains high. The question of course relates to the policies being introduced and the level of spending in the short-to-medium term combined with the debt stragities adopted by the current Government – are they sound? One surely casts doubts on a positive answer to this question. This really is a budget that has some flavour but a lot of unrealistic postulations about the future economic rebound of both our country and the world – of course, this couldn’t be because we have an election year next year could it ? Ah, politics never ceases to amaze me.

Agree with me ? Disagree ? Drop a comment below.