Budget 2015

[DeepState]

It's a far cry from the rhetoric per election where every dollar of deficit was like a drop of blood cruelly taken from future generations. The world was collapsing into a blackhole of Labor debt when it was just $18B. Twin blackholes for Hockey maybe?

It's a shame some meaningful reform wasn't implemented, with the associated savings churned into IA vetted infrastructure. With borrowing rates under 3% out to 15 years there's probably never going to be a better time to start building the infrastructure we need to cope with rampant population growth that both major parties support. With project providing 20%+ returns, it would seem to be a no brainer to ramp up infrastructure spending, but then that would require a backtrack on debt is bad, surplus is good rhetoric.

The cynic in me can see the small business sector rorting the 20K immediate deduction. It's due to end when the car industry shutters, so not sure if it's a good idea to draw what could be a lot of demand forward before it finishes when 60K+ of workers are out of decent paying jobs.

There's still no coherent narrative and policy on how to get the deficit on a sustainable path to balance. The forward estimates are a joke. Wages growth is at it's lowest in decades, and will continue to stagnate till we regain our international competitiveness. The budget is predicting the ToT to plateau at a rate something like a 1/4 higher than the historical average. Hockey has set himself up to be swanned every year as the ToT continues falling to overshoot the long term average before finally balancing out.

hockey is also forecasting unrealistic non mining sector investment growth. Next FY it's 4%, beating the latest ABS CAPEX forecasts which indicates oncoming falls in investment intentions. To then predict investment growth to double to 8% the year after, when the car industry is closing down and taking a lot of the component manufacturers with it, well that's a unicorn on a rainbow too far for me.

To use the above to predict unemployment will peak at 6.5%, free lolipops for all, and a unicorn as well.

Wage growth of 2.5% also seems a bit over the top when most are receiving nowhere near that. Possibly that's a prediction for minimum politician pay rises?

All up I see the deficit will have a 4 in front of it than a 3.

As always, fantastic thinking, Syd.

Questions/Observations:

A more politically neutral document. Less strong positions. A natural outcome from the acrimony of the prior year. Table thumping about a budget emergency has given way to a more realistic appraisal that we aren't exactly heading into an emergency right at the minute. Interest payments are ~5% of revenue for 15/16. However, social security payment increases are very real and must be allowed for.

Pro family. Keeps super untouched and commits to leave it that way for the term of the government. Stimulating small business to generate employment. Got stuff for the older vote: PBS increase, pension reform. Financed a lot by various savings from rorts around the place, closure of detention centers and East-West. Nice touch on Multinationals Anti-Avoidance. Add some more to national security. All of this looks politically easier. Aiming high previously has resulted in over-reach. What's next? Lowered expectations.

Private non-mining investment is wider than the matters covered in the capex survey. For one thing, that excludes private residential and a bunch of agricultural etc. RBA policy is clearly aimed at stimulating housing. Maybe there is something to that.

ToT is forecast to decline by another good chunk next year before flatlining. Hard for me to say whether that makes sense or not. Estimates on this have been wildly wrong and this has cost the budget expectations a great deal. What would iron ore need to become to drive this back to the levels you imagine? Or, alternatively, how much more expensive must imports get in a world struggling with low-flation? Is that reasonable?

International competitiveness is somewhat questionable as an issue keeping domestic wage pressure contained. Our export mix hardly has any manufacturing in it. We are supported by primary exports. That said, the Real Effective Exchange Rate rose by more than Nominal during the boom because our unit labour cost (driven primarily by mining and related) rose strongly vs RoW. Either the AUD has to fall a lot, or unit labour costs need to come down. They are coming down in mining and related. Nonetheless, most of the wages expended here are applied to non-tradeables or non-traded. International competitiveness can also be absorbed via lower profit share from companies rather than labour. Also, over the forecast period from this year, we aren't seeing any material increase in real wages at all in the assumptions. That is a reflection of weak bargaining power of labour, all in all. Consider that we have seen real wages growth in 2013/14 and (forecast) 2014/15 of 2.5% in a period of rising unemployment and increased spare capacity looking for redeployment (geez, I still hate my tradies...). The CPI in these years was knocked about by currency impact on tradeables and, more recently, oil. Still, wage inflation approximated good prices.

They aren't looking to a weaker currency as a source of magic. AUDUSD is assumed 0.77. Neither are we to anticipate a fillip from yet lower energy prices.

One thing for sure is that the budgets of recent years have been far too optimistic in their assumptions. Maybe we will see a 4-handle with a negative sign on it in the wash up.

 

[sydboy007]

As always, fantastic thinking, Syd.

Questions/Observations:


Private non-mining investment is wider than the matters covered in the capex survey. For one thing, that excludes private residential and a bunch of agricultural etc. RBA policy is clearly aimed at stimulating housing. Maybe there is something to that.

ToT is forecast to decline by another good chunk next year before flatlining. Hard for me to say whether that makes sense or not. Estimates on this have been wildly wrong and this has cost the budget expectations a great deal. What would iron ore need to become to drive this back to the levels you imagine? Or, alternatively, how much more expensive must imports get in a world struggling with low-flation? Is that reasonable?

International competitiveness is somewhat questionable as an issue keeping domestic wage pressure contained. Our export mix hardly has any manufacturing in it. We are supported by primary exports. That said, the Real Effective Exchange Rate rose by more than Nominal during the boom because our unit labour cost (driven primarily by mining and related) rose strongly vs RoW. Either the AUD has to fall a lot, or unit labour costs need to come down. They are coming down in mining and related. Nonetheless, most of the wages expended here are applied to non-tradeables or non-traded. International competitiveness can also be absorbed via lower profit share from companies rather than labour. Also, over the forecast period from this year, we aren't seeing any material increase in real wages at all in the assumptions. That is a reflection of weak bargaining power of labour, all in all. Consider that we have seen real wages growth in 2013/14 and (forecast) 2014/15 of 2.5% in a period of rising unemployment and increased spare capacity looking for redeployment (geez, I still hate my tradies...). The CPI in these years was knocked about by currency impact on tradeables and, more recently, oil. Still, wage inflation approximated good prices.

They aren't looking to a weaker currency as a source of magic. AUDUSD is assumed 0.77. Neither are we to anticipate a fillip from yet lower energy prices.

One thing for sure is that the budgets of recent years have been far too optimistic in their assumptions. Maybe we will see a 4-handle with a negative sign on it in the wash up.

ToT

thermal coal - The Budget says $66. Mac says $55. Considering China is protection it's high cost producers that means there's nowhere left for the deluge of coal on the market. USA is trying to export unwanted coal due to cheap natural gas. India seems to be finally boosting production as well.

Iron ore - Still further supply increases over the next 12 -18 months. Chinese housing investment is down massively YoY with no sign of growth in the near future. No other country can step into the demand shortfall from CHina. Price has to keep dropping to below $40 to clear out FMG and other higher cost producers. Roy Hill will likely be the marginal producer.

Coaking Coal - on the way down with Iron ore. There's just no demand for it with surplus supply. Coaking coal halved in price on a roughly 13% supply surplus last year. Iron ore will be like 30-40% supply surplus.

All in all the Budget has been fanciful with their unicorn predictions. Can prob see $10B budget hole just from this.

Employment growth will be anemic, due to consummer spending being weak. Companies don't need to invest when there's already excess capacity. Not sure how much an extra % of unemployment will affect the budget but it certainly wont help. The only thing that might help the unemployment stats is a falling participation rate. I tend to think aggregate hours worked is a better "feel" for how the economy is going. More hours = more income for workers, though it may not be evenly shared if large swings from full to part time employment.

Housing - WA will be decimated, especially as supply has ramped up just as pop growth is tanking. Sydney may survive better due to a much bigger supply deficit. Melbourne will keep going till the Chinese stop buying dob box apartments in docklands. The issue is renting / buying a home is a choice, and when money is tight people move into what were once spare rooms / back with parents. In the USA what was a supply deficit rapidly turned into excess supply due to this.

As wages stagnate, rents will too. You can leverage income 20 times for rent like you can for houses. I wonder how things will go once the specufestors decide capital growth wont be enough to make NG worth their while?

Household debt is around 160% of GDP. Before the prior recession it was < 40%. That's a scary house of cards just waiting to blow over. Households are basically tapped out. The banks have minimal capital to help with bad loans, and the LMI companies are even in a worse capital position. Whn the Govt is forced to step in the AAA rating is toast.

RBA has little in the way of interest rate cuts left in the bag. As soon as the USA indicates rate rises are on the way the banks will find their margins under pressure. THis has already happened to a degree with them passing on just 20bps from the last cut.

To me this budget is a political con job. Abbott and Hockey are trying to do what Labor did by predicting far better revenue than is going to happen. This has allowed them to pander to various interest groups, but the money isn't really there. They'd have been far better to get their forecasts closer to reality and use that as justification for some meaningful tax reform. It may dent confidence at first, but I think once business and people start to believe the Govt actually has a plan, we'll see things start to pick up.

 

[sptrawler]

Problem is Syd, meaningfull tax reform would not be passed and the media and Labor would have had a field day.

It is sad, but it is reality, the media runs the agenda.
Therefore more bad news makes easy media copy, nothing better to fill the news, than bad news.

It is really hard to fill a newspaper and/ or t.v news hour, with "all is going well nothing to report".

Both parties suffer from the same problem, that's why Labor did sod all, also when in office.

The Henry report + the White Paper = sod all.

Why? because all the politicians are interested in is self preservation, and the media is only interested in crucifying a politician.lol

No one with a voice, is interested in Australia.IMO

 

[qldfrog]

No one with a voice, is interested in Australia.IMO

I sadly agree with you and as the voting majority is not especially smart, we will have to suffer blood and sweat before any fundamental/critical reform is ever done

 

[sydboy007]

http://www.businessspectator.com.au...&utm_content=1362119&utm_campaign=kgb&modapt=

All this great stuff is undone, however, in explanatory notes which states that the draft law specifically excludes cloud services from being captured by this new regime.

It is as if this legislation were written by the very powerful and under-radar multinational tech lobby – the very group it is supposed to be capturing. And there is a good chance that this is precisely what happened.

Far from closing a loop-hole, this law effectively sanctions billions of dollars in taxable income earned in Australia being sent offshore.

The explanatory notes also declare that a foreign company that sells complex enterprise software in Australia, and which employs highly-skilled staff in Australia who assist with customisation and high-level customer support, must pay tax on local revenues.

No word on how cloud-hosted enterprise software is treated. But it is fair to say that this law does nothing to encourage foreign firms investing in their Australian operation, or indeed investing in their own customer service.