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Chapter 1: What are the expectations for the upcoming federal budget?
Welcome to Fear and Greed Q&A. I'm Sean Aylmer. As always, on a Monday, we have our resident economist, Stephen Koukoulis, giving us his take on the week ahead. And normally, Michael Thompson does the interviewing, but he's still on holiday, so I'm filling in. And of course, it's a huge week. The federal budget comes down tomorrow night. Good morning, Stephen. Good morning, Sean.
Well, Kouk, you worked in Treasury. You've been an advisor to a prime minister. Is budget week kind of like Christmas?
Kind of like, no, sort of more like a bad hangover because, and I dare say this one has been framed in a rapidly moving undercurrent. So what the process is that in sort of December, January, February even, the government, the treasury departments and the policy advisors lay out a platform for what they want to achieve broadly.
Obviously, they don't make all the decisions, but they have a list of things that they would like to achieve, including the budget bottom line. This time around, as we know and as the Treasurer has told us on many times, it's a rapidly moving fee.
So the poor devils in Treasury and in the Treasurer's office and the Department of Finance and everywhere else that's involved will have been rejigging, recalibrating the numbers. What's the oil price assumption we put in? What are we going to do about cost of living relief? You have the RBA hiking interest rates sort of thrown into the mix as well.
I think when the budget does come out, there'll be something of a collective sigh of relief.
When they're framing the budget, obviously fiscal spending adds to aggregate demand and Michelle Bullock last week didn't quite say it in as many words, but she certainly said, you know, the government along with private spending add to aggregate demand, therefore it plays a role. How much is it politics versus policy?
Like how much of it is the government saying, hey, we need cost of living and relief and the bureaucrats saying, yeah, okay, but you're going to get higher interest rates?
Yeah, and I think it's always policy versus politics in many ways because over the years gone by, just excluding this particular period where we've got an inflation problem, often it's the case, well, what does it mean for us electorally? And then, okay, what are the economic consequences for it? So in many ways, other than a few exceptions, it's the wrong way around.
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Chapter 2: How does the government prepare for budget week?
an element, whether it's a big or a medium-sized element of truth in the fact that government spending is adding to growth, adding to demand, and the Reserve Banks, on the other hand, trying to sort of squeeze growth and squeeze demand by hiking interest rates. So they would be well aware of that.
So what comes out tomorrow night, you would assume, and given what's been going on, it'll be a tight budget.
Okay. Another hypothetical here. We know there's going to be changes to the capital gains tax. We know that negative gearing will probably be wound back for investment houses. We know that maybe we end up having a minimum tax rate on trusts. So there is reform in the budget. Do you think it's as reformist as maybe the government would have liked a couple of months ago?
The short answer is no. And I think if you ask most economists who look at these public policy issues and tax policy and the efficiency of these sorts of things, you would say that the reforms that we're speculating about that are probably going to be in there are all a step in the right direction, definitely, but they're only a baby step towards what needs to be a giant leap for taxation policy.
And so in a sense, you're sort of getting this move in the right direction. But as we said, if you were to go... and completely unwind capital gains tax concessions and negative gearing and not grandfather it and issues like that, which, again, we'll wait and see what actually happens in terms of the details.
But if you were to go cold turkey and this is the best economic policy that you could come up with, you would create a lot of upheaval and you would have a very good chance of losing the election. And, of course, politicians get criticised for that, but that's their job to get re-elected. They don't want to lose their job, nor do most other people.
Okay, so what do you expect tomorrow night in terms of economic parameters, budget bottom line?
Right, well, we saw the RBA put out their forecast last week in the Statement of Monetary Policy. There's usually not a big difference between the two because Treasury and RBA do talk to each other. So we'll have a slowing rate of economic growth coming through both 26-27 financial year and probably into the 27-28 financial year.
Unemployment will be forecast to be a little higher, inflation higher, staying higher for longer. Oh, you know, I'm sounding pretty gloomy here.
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