An election budget to be sure, but not without some significant risks from economic shocks.

On budget night, the election coverage said it all. For some media outlets, the incisive analysis from economists and business commentators was replaced by focus groups in Western Sydney commenting on what the budget meant for them. That speaks volumes for this budget – politics has primacy in an election year. In the realm of political science, it is well known that people vote with their wallets (pocketbooks) and the government is placing their electoral fortunes on a tried and tested approach.

The political science is a little more nuanced than a cash grab, as voters also consider the impact on their wallet in the medium term i.e. they may get the cash now but will their prospects deteriorate as a result. And that is the big question. (Both Kevin Rudd and Julia Gillard fell for this trap)

This budget delivers mixed messages. The government has provided a six-month cut to fuel excise. But the price of oil will roughly stay the same over the forecasting horizon. Meaning 6 months down the track, voters will face fuel prices similar to what they were yesterday.

Unemployment down, wage pressures emerging and inflation rising. Interest rates are set to rise over the next two years at least. But the Government, has extended a Home Guarantee Scheme (50,000 places per annum over 3 years) to pump prime demand especially amongst those groups that are most sensitive to the smallest movements in rates. It is no secret the development and construction sectors are facing labour shortages and supply chain disruption, so pump priming demand could be the perfect storm. If that wasn’t enough, they have lifted the borrowing limit of National Housing Finance Investment Corporation by $2 billion to fund a further 8,000 affordable homes.

By the Governments own admission in the budget papers, new dwelling investment is - 0.5% in 2023-24 after a long growth hot streak.

The storm can be averted but it will require a concerted effort from all stakeholders to repair the supply chains (and ease price pressures) and ensure that there is sufficient labour at hand to deliver the homes. In a tight labour market this wont be easy but, to their credit, the Government have provided cash incentives to new apprentices and wage support to employers.

There is a real possibility that the policy settings will exacerbate economic pressures facing the housing market and lead to (smaller than we have experienced) price rises in the face of rate rises. This may not mean better returns for developers and builders as production costs continue to increase. There are some turbulent times ahead but the skilled heads would have already got contingency plans in place.

What we are experiencing now is almost a mirror image of the oil price shocks of the early 70’s. Back then there was the war in middle east and oil price shocks which created long term economic stagflation (high unemployment and inflation). These twin evils won’t necessarily materialise this time because currencies are floated and are not linked to gold deposits and governments have shown their willingness to print money to get out of a spot. In the 1970’s they severely limited money supply growth.

The budget should keep house prices at present levels (at least) for the short term. Developers will indirectly benefit in the short term from homebuyers trading up to newer houses but may have to take a hit on land prices to offset increases in construction costs. It doesn’t look at rosy in the outyears.  In terms of the overall budget, it is judged for what it is – an election budget and the key question is will the punters take a short-term view (in which case it sets the Government up for re-election) or a medium-term view (which is far less appealing).

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