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Hedge Clippings | 17 May 2024 The next federal election is not due for another year, but the budget handed down on Tuesday had all the hallmarks of a government preparing for the polls without actually setting the date. Jim Chalmers won't admit it, but based on this comment from Chris Richardson during the week: "If the enemy is inflation, the IMF says you should cut spending and raise taxes. Instead, we're getting a very big tax cut and almost matching that with large increases in spending," then we're heading for trouble. If Richardson is correct, and we're certainly not going to doubt him, then Chalmers is at odds with the IMF, as well as one of Australia's top economists. Meanwhile, Treasury (presumably the advice he's relying on) is at odds with the RBA's estimate of inflation as pointed out in this piece: "Treasury has inflation heading in one direction - down - while the Reserve Bank says the opposite. They can't both be right, and what happens will play an outsized role in deciding when, or if, the central bank cuts interest rates. The government claims the budget has been designed to take three-quarters of a percentage point off inflation this year and another half a percentage point next year, while unemployment will rise slightly to 4.5 per cent next year. Time will tell if Treasury or the central bank - which has forecast inflation to be 3.8 per cent in December this year - is correct. Without a rate cut, there is close to zero chance of an early election." So Jim's budget is increasing spending via handouts across the year, topped up by Stage 3 tax cuts due in July, and wage increases already announced or in the pipeline, hoping inflation will reduce to 2.75% mid next year (around the scheduled election time) while the RBA's own forecast is for it to still be 3.2%. Given the RBA's stated driver of interest rates is taming inflation, there's a chance of a rate cut - or possibly more than one - by this time next year, but only if their forecasts are correct, and it's a big IF based on the stickiness of inflation to date. In the government's favour, this week's employment figures (along with some positive signs from the US) showed unemployment creeping up to 4.1% on a seasonally adjusted basis. The RBA's other role of maintaining full employment is secondary to inflation, but it is noteworthy that the number of unemployed people has risen 13.7% from one year ago, and Michele Bullock is on record as saying an unemployment rate of 4.5% or above would be required to have a significant effect on reducing inflation. You can't blame the Treasurer for pitching the budget and blowing the "surplus" trumpet towards the next election - whether in December or in the first half of next year, but he is ignoring the longer term deficits. He'll worry about those in due course, or leave them to his successor. News & Insights Magellan Global Quarterly Update | Magellan Asset Management April 2024 Performance News Bennelong Long Short Equity Fund |
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