A Different Analysis of a Different Budget in Different Times

There are some governments around the globe that are not releasing their budgets in 2020 – the UK is case in point. So, hats off to the Australian Government for releasing a budget. At least with a plan, there is something to aim for.

However, national budgets are more than financial transactions – they set the conditions and policy framework for national prosperity. Admittedly, it’s a very tough time to be doing a budget. This budget was the cash splash like no other. Time will tell whether it works but the jury should be out at the moment.

Some of the forecasts are heavily weighted on the side of optimism – a 4.75% growth in GDP in 2021 and an unemployment rate of 6.5%?  They must know something that everyone else doesn’t.  We are not saying it won’t happen but there are some missing ingredients.

Such miraculous policy feats can only be achieved through breakthrough improvements in productivity (an area where we have been a laggard for almost a decade). There were no big strategies or plans to boost productivity and limited mentions of regulatory reform in this Budget. So, we are spending money like never before in an economy that is set for 2019. Reform is difficult and sometimes painful – but when unemployment is so high it is the perfect time to make those tough decisions. Unfortunately, incrementalism prevailed over rationalism in this budget

If you are in property, forget the handouts and affordable housing plans. An industry reliant on cash handouts is mendicant. Cash handouts distort investment decision making and dampen long-term performance.

There are two factors that lie heavily on the property sector.

First, is the unemployment rate. There was once a CEO from a major development company who had back of the envelope calculations for whether a development site was feasible or not. He didn’t engage a band of consultants for advice, he looked at the unemployment rate (and job growth rates) as a major influence – it determined what the future demand for stock would be and also was a useful indication on the future stock of labour that could be drawn upon for building the community. (Let’s hope the budget forecasts for unemployment are correct because they will bode well for development.)

Second, is net migration. The economy and the property has got fat from the teat of record immigration numbers over the last decade (admittedly they have been dropping off slightly). And this is where the real problems begin. There will be -72,000 net migration, down from 154,000 in 2019. Without growth in net migration, productivity and reform becomes even more important. But for the property, with household formation rates at 2.6 people per house this means that for every year of no net migration there will be 87,000 less homes required. That is more than a third of all homes built across Australia in 2019.

We are not reporting on impending doom. There is latent demand in the market and that’s why the government is introducing the range of cash incentives for buyers. But you can only bring forward investment so much. There is not a unity price sensitivity for demand and price, so it is unlikely that we will experience the 30% falls in price as quoted by some forecasters at the beginning of the pandemic – but there will be some correction, adjustment and pain over the coming fiscal year. It may be felt in the rental sector as people may prefer to use incentives to buy and not rent. Similarly, the adjustment may be experienced in high density apartments over detached housing due to ongoing COVID uncertainty. It is just too difficult to predict. What we know is there will be adjustment, we just don’t know where and how.

But given that there will be adjustment, in one of Australia’s largest contributors to output and jobs makes the budget forecasts even more baffling. They look a little like the balance of payments forecasts under the Hawke Government which were designed to calibrate expectations rather than be accurate forecasts.

All things considered, the Treasurer and Government have done an admirable job in framing a budget in tough times. They could have squibbed it and cancelled the budget announcement. It is probably too early to know where this will all land. The Government just need a strategy, make some much-needed reforms and remove the reliance on assistance to reset the economy when the dust settles.