DEUTSCHE BANK: Joe Hockey Got One Really Important Thing Right In The Budget

Joe Hockey on budget night (Photo: Getty)

Here’s one thing that Joe Hockey got very right in his first budget.

The treasurer made sure he didn’t cut too hard, too soon.

Several investment houses have pointed this out in the their budget summary notes, including Deutsche Bank:

With many of the savings measures offset by new ‘spending’ (on both the revenue and expenditure sides) this Budget only represents a very mild tightening in fiscal policy over the next two years.

That said, measures in the Budget build on decisions taken by the previous Government. Together, this sees policy decisions tighten fiscal policy by a cumulative 0.5% of GDP in 2014-15 and 1.25% in 2015-16 relative to the baseline.

Looking at the fiscal impulse (i.e. the change in the Budget position) suggests a fiscal tightening in the order of 0.8% of GDP in 2014-15 and 0.8% in 2015-16 (note we have excluded the $8.8bn payment to the RBA in 2013-14 from this estimate).

They also have this fantastic chart that illustrates the impact of existing, and new policy decisions.

Spending will be slashed — including in education and health. Last night also saw new tax measures unveiled, along with widespread public service job cuts, and a huge infrastructure investment package, designed to boost the economy.

These, and the other measures announced — including the deficit levy on high-income earners — are designed to bring the budget back to surplus by the beginning of the next decade.

Many of the measures outlined are bold. The cuts are even deeper than the ones suggested by the Commission of Audit (as shown by the UBS chart below). But the Government faces a tough fight in the Senate to get some of them through.

This is partly why DB, along with other commentators, have described the treasurer’s maiden budget as a good step, but not a cure.

As had been pre-released ahead of the Budget there are a wide range of individual measures, from tax increases, to paid parental leave, to an increase in Federal spending on infrastructure. Our focus, is however, on the macro; not the measures. Here, on balance, this Budget takes a ‘step’ to repairing the structural fiscal deficit we were highlighting in the lead-up to last-year’s Budget.

That said we also note – as was the case under the previous Government – that budget savings measures are ‘back-loaded’. A number of measures will also need to navigate the Senate. Hence the phrase: ‘a step’. As a final comment we think that in the current Australian policy discourse infrastructure investment is starting to sound a little like an elixir that cures all. In our view policy makers need to focus a more on how infrastructure is priced and also ensure that spending follows a rigorous, public and independent cost benefit analysis; rather than just boosting the ‘dollar spend’.

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