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Wall Street + Wayne = Budget Surplus!

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by Peter Switzer

The two big money news stories are easy to see. Wall Street had another bad day at the office being down for most of the session and Treasurer Wayne Swan bunged on a mini-budget to increase his chances of getting a budget surplus.

So, mathematically, you could express it as:

Wall Street + Wayne = Budget Surplus!

Optimistic scenario

I know I have been a big critic of the world’s greatest finance minister, well according to Euromoney magazine, but you know, he just might pull this one off. And my assessment of what’s going on behind the scenes of today’s sell-off on Wall Street could prove Swan and me right!

Did I write that? My conservative supporters will be cringing but as an economics and market commentator, I can’t tell you sweet little lies like Treasurers can.

However, before you start tweeting in retribution, let me argue that this surprisingly optimistic scenario for Wayne and his Labor sidekicks rests on the Reserve Bank (RBA) playing ball and cutting interest rates further, starting on Cup Day.

In a nutshell, the Mini-Budget says the $1.5 billion surplus will now be $1.1 billion, but this is all guesswork and I reckon if Wayne gets his surplus it could be bigger, which will make him look like a genius.

Main changes

Here are the main points:

The four-year surplus goes from $7.5 billion to $6 billion, but who cares? This is years away and there could be a new government by then.
Treasury is tipping three per cent economic growth, which is a chance despite the fact I reckon we're growing at a slower rate now.
Wayne has unemployment at 5.5 per cent but its 5.4 per cent now and so this could be from cloud cuckoo land.
The Private Health Insurance (PHI) rebate is to be reduced. The premium the rebate is based on will only match the inflation rate or the prevailing commercial rate or whatever is lower! So if the commercial premium goes up by five per cent and inflation is two per cent, you lose out and Treasury gains.
The baby bonus drops from $5000 to $3000 for the second child.
State grants drop by $765.4 million in 2012-13 and more in later years. This is our punishment for voting Liberal at state elections!
The mining tax was supposed to bring in $13 billion but now its tipped to be $9 billion because of lower commodity prices.
Billion dollar businesses will pay company tax monthly not quarterly from January 2012 but will be phased into $20 million operations by 2016.
SMSFs will see their supervisory levy go up from $191 a year to $390 and lost or dormant super with balances of $2000 or less will be taken off super funds and given to the ATO.
Those who salary sacrifice for products or services provided by an employer will lose the concessional fringe benefits tax treatment, which could make this trick less attractive. Corporate boxes at sporting events could be more expensive after this change.

Read between the lines

These are all the nitty gritty stuff, but I prefer to read between the lines. It seems to me that Wayne is screaming out to the Reserve Bank that he’s sticking to his Budget Surplus goal and so help out and give us more interest rate cuts. He needs them if we're going to grow at three per cent, because that will bring in the tax revenue and help keep unemployment down, which costs the Government via dole payments.

Maybe the equation should be:

Wall St + Wayne + RBA = Budget Surplus!

On Wall Street

To support my case, the big takeaway from Wall Street’s recent fall is that the September quarter is going to be the worst, but after that we could easily see an improving stock market in early 2013. This will help confidence and when combined with lower interest rates could just bring the economic growth needed to produce a surplus.

There are a lot of ifs and buts for this to happen, however note a few points from Wall Street overnight:

Around 25 per cent of S&P 500 companies have reported in the USA and just about 60 per cent have posted earnings above expectations — not bad for the expected worst quarter. However, only 39 per cent have beaten revenue forecasts, which is not all that bad given how poor the quarter was economically.
CNBC says FedEx will put on 20,000 seasonal workers for a big Thanksgiving/Christmas period. That’s up 13 per cent.
The Spanish PM had an election win in his home region, which augurs well for him eventually asking for a bailout which would help EU and market confidence.

Anyone looking for some optimism, watch my interview with Michael Knox last night.

Finally from the wide weird world of wealth, Ancestry.com — the genealogy website — has said yes to be acquired by a European private-equity firm called Permira for around $1.6 billion!

For the record, the Dow gained 2.38 points or 0.02 per cent to 13,345.89 and the S&P 500 added 0.63 points or 0.04 per cent to 1433.82. Note the S&P 500 stayed above the important 1420-level.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, October 23, 2012