It’s advisable, if not required, for all businesses to create an annual report. Shareholders, customers, suppliers and creditors analyse these reports to understand how they will be impacted in the coming year. The Federal Government is no different, except every Australian (the shareholder) is affected by the report’s contents. Last week’s annual report (the Budget) informed us that the Government was gently restricting fiscal policy. So what will this mean for Australians?
Governments are elected to deliver certain services to their shareholders. Each shareholder lives in a different environment, and has different challenges, wants and needs. They therefore have a different view on what they want their government to deliver for them.
Mr Maslow created a hierarchy of human needs which shows how a person’s needs change once you satisfy the most basic needs – food & water (etc). The next want is shelter, security (etc), and once this is achieved, you move up to the next level.
Irrespective of whether your needs are the most basic, or you have almost everything you could ask for, you exist in an economy and have a standard of living you either want to maintain or aspire to. You are dependent on how things are run; and therefore on the government of the day and economic growth.
Aside from laws, two important levers are used to help manage an economy and outcomes for the broader population. Fiscal policy refers to the use of taxes Government spending to influence the economy. Complementing fiscal policy is monetary policy, which influences the economy through the amount of money that is in the economy. In Australia, monetary policy is set exclusively by the RBA using tools such as changing official interest rates, buying/selling currency, or in some instances buying bonds.
Monetary and Fiscal policy therefore have a big influence on the speed of the economic growth, jobs, inflation and general welfare.
In our previous note we outlined the challenges for our Government, and why they need to reduce what they spend, or increase what they receive (taxes). Our economic growth is weakening, and unemployment at an unfriendly level. Government spending (via fiscal policy) also has to consider lifting economic growth. We need bang for every buck of spend alongside some savings measures. We need businesses help, and they need confidence on policy.
Small business accounts for around ½ of private sector employment. If you want to lift employment – encourage small business. To meet this objective, the Government announced a 1.5% tax cut, and introduced a temporary (until 30 June 2017) small business tax offset for items purchased for less than $20,000. This is clever policy because it delivers a cash injection into the economy for items such as vehicles, tools etc which should lift productivity.
The Government largely left welfare spending alone, apart from some ‘integrity measures’. Retirees who own their own home AND have assets over $800,000 will no longer be eligible to receive part pension. The Parental Leave scheme is being wound back so families cannot claim both the government and employer paid parental leave. They have announced a further $3.5 billion in childcare funding.
The Government was keen to promote its forecasts of declining budget deficits, but are they correct? GDP growth is central to the underpinnings of the budget forecasts. Essentially, the more the economy grows, the more money the Government will receive from taxes and the less the Government will have to spend on welfare programs like unemployment benefits.
In 2014, Australia’s economy grew by 2.3%. Next year the Government predicts that growth will be around 2.75%. Further, in 2016/17 they expect it to lift to 3.25%, and stay at that level until 2020. This is an optimistic forecast to say the least; however it is possible.
These predictions are not only affected by domestic activity, but also external forces such as changes in China’s economy, commodity prices, or consumer & business confidence.
While all the focus is on the fiscal policy this week, the RBA has been doing most of the heavy lifting to date. Their use of monetary policy tools (eg selling currency, lowering interest rates) has helped to encourage the local economy. Cheaper money through reducing interest rates to historic lows has been a favoured strategy. With most Australians on variable rate mortgages, reduced rates free up cash for mortgage payers to spend on other goods and services within the economy. This is part of the reason why the RBA is more influential in stimulating the economy in Australia than central banks around the world.
Loose monetary policy is complimenting the pro-business confidence and not so austere Budget. The Budget this time around won’t repair the Government’s finances, but a bet on lifting economic activity might save the day.
A cynic could say this Budget will improve the Government’s political fortunes, rather than Australia’s. Only time will tell.
