Australian Federal Budget
The second federal budget of the current Labour government delivered an eye-catching surplus of $4.2 billion for the current financial year, largely on the back of revenue windfalls from historically high commodity prices boosting company taxes as well as wages inflation contributing to higher income tax receipts from bracket creep. This will now ensure the stage 3 tax cuts legislated by the previous government are now almost certain to be delivered next year.
Investors should always take budget forecasts by the grain of salt evidenced by the fact that as recently as October last year, the current year budget was forecast to be a deficit of $36 billion only see a $40.2 billion turnaround in just eight months! The return to surplus was driven by cyclical factors rather than government policy so structurally the budget will remain in deficit for the foreseeable future driven by spending as a % of GDP at well above pre-COVID levels.
Given the regressive impact of high inflation, it is understandable the government would assist lower income earners with a range of cost-of-living assistance measures totalling some $15 billion (over 4 years) however the $12 billion in stimulus ear-marked for next year will work contrary to the Reserve Bank initiatives to dampen inflation. Unfortunately, the budget surplus will be short lived as new spending programs will return the budget to a $13.9 billion deficit next year before ballooning to $35.1 billion the following year. To some degree, the budget was a lost opportunity to bank the benefits of an unexpected cyclical surplus which will be transitory given the expectation of slower growth next year as tighter monetary policy begins to bite. Although the lack of fiscal austerity was disappointing, the budget was not irresponsible and will not have a great impact on the market’s direction.
Can the US really default on its debt?
Like a movie that we’ve seen many times before, the US is once again facing a political standoff over raising the debt ceiling to fund the government’s spending obligations. The impasse has arisen because of the divided nature of the US government, with the Republican Party assuming control of the House of Representatives in November last year, while the Democrats control both the Senate and the White House. While the spectre of the US government defaulting on its debt obligations sounds dramatic, and indeed would be a seismic event for financial markets, it is highly unlikely to occur.
Under the US Constitution, the House of Representatives holds the “power of the purse” meaning that it must approve all tax and spending bills including the aggregate amount the government can borrow which then must be consented by the Senate and signed by the President. While the President has broad ranging powers and can veto any bill passed by Congress, he (or she) does not have the unilateral power to approve government spending or borrowing. Given the large and persistent government deficits over several decades in the US, including the extraordinary level of government spending during the pandemic, the US government’s debt has ballooned up to the $31.4 trillion limit last approved in November 2021. This has resulted in a familiar political stare-down with both sides of politics standing their ground to extract concessions from the other side.
The Republicans for their part are quite legitimately trying to curb the rampant growth in government spending which ignited global inflation in 2021 and which is likely to see a federal deficit more than $1.5 trillion in the current fiscal year. The Republican House has already passed a Bill that increases the debt ceiling by $1.5 trillion in return for spending levels to be returned to 2022 levels. The Democrats position is that additional borrowing is required to implement spending that has been already approved by the previous Congress and are unwilling to make cuts to the $7 trillion of spending proposed in their recent budget.