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Why AMP Capital’s chief economist is optimistic on the Federal Budget

Now the dust has settled, there’s a little something in the Federal Budget for everyone. We look at AMP Capital’s analysis.
The post Why AMP Capital’s chief economist is optimistic on the Federal Budget appeared first on The Motley Fool Australia. –

A mature woman hold a plate of cake, licks her thumb, indicating a share price dynamic of 'have your cake and eat it too'

Now the dust has settled, the Federal Budget has been unmasked. And there’s a little something in it for everyone.

As AMP Capital head of investment strategy and chief economist Shane Oliver says, it’s a “have your cake and eat too” budget.

Speaking at AMP Capital’s Webinar yesterday, Oliver only listed 2 real losers in the Federal Budget. Namely foreign aid recipients and the future generation of taxpayers.

Core highlights of the Federal Budget

Some core highlights of the Federal Budget include:

  • $17.7 billion in aged care spending over 5 years 
  • An additional $1.7 billion for child-care subsidies over 4 years
  • $15 billion more funding for the $110 billion 10-year infrastructure program 
  • A $1.2 billion package to support the digital economy

The Federal Budget also flags an increase in spending on preschools, mental health, and additional assistance for first home buyers and single-parent home buyers. Tax cuts are also on the agenda.

According to AMP Capital, the total direct stimulus to the economy (spent and projected) since the early onset of the pandemic has now reached approximately $350 billion.

With that kind of spending the budget deficit is expected to reach 7.8% of Australia gross domestic product (GDP). That’s the highest share of GDP since 1946. Though, as Oliver notes, “At least it’s well down from the 11% projected in last October’s budget.”

Oliver said the government eschewing fiscal austerity and instead focusing its efforts on growing the economy “is the right thing to do at present”.

As for the Aussie dollar, AMP Capital forecasts it will likely top 80 US cents by the end of the year. That’s largely due to strong commodity prices lifting the Aussie dollar at a time of expected weakness for the greenback.

Reasons for optimism

According to the government’s own estimates, the Federal Budget won’t see a return to surplus for 10 years. Economic growth should help reduce the debt burden. But population growth of 0.1% this financial year, the lowest since 1917, will see less money flow into government coffers.

Oliver offered a slightly more optimistic timeline, saying we might see a return to surplus in the Federal Budget in 8 years.

He pointed to the high price of iron ore as supporting corporate income – and the government’s tax take. And he believes the government’s estimate that iron ore will fall to US$55 per tonne by March next year is pessimistic.

I reckon the government is being a bit conservative here. Iron ore’s currently running at US$228 per tonne. And if it stays around US$200 it will add almost $20 billion to government revenue.

Oliver also pointed to the stronger than forecast rebound in the Aussie economy, which has seen JobKeeper eliminated and JobSeeker outlays reduced.

In fact, he said, Australia was one of the very few developed countries where employment is now higher than it was pre-COVID, thanks to the government’s stimulus measures and focus on workers with JobKeeper.

“When we needed it, it was there,” Oliver said. He contrasted Australia with the United States where, despite the US economy running hot, employment is still 5% down from where it was before the pandemic.

Another reason for optimism are the rock bottom interest rates Down Under.

“The rate of interest is below the rate of nominal growth in this country. Historically that tells you that the debt level can be sustained,” he said, adding, “The risk there is if interest rates and bond yields rise dramatically.”

However, Oliver said he wasn’t too concerned about a sustained spike in inflation. Instead, he sees this as a short term (1-year) issue, caused by distortions in supply and demand as the world emerges from the pandemic.

Overall, Australia should also benefit from broader global growth. Oliver said he’s optimistic on 4 fronts: “massive fiscal stimulus and ultra-easy monetary policy”; pent up demand; very high savings rates; and the COVID vaccines are working.

More on Oliver’s take on the Federal Budget’s likely impact on the All Ordinaries Index (ASX: XAO) to come…

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why AMP Capital’s chief economist is optimistic on the Federal Budget appeared first on The Motley Fool Australia.

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