The 2020 Budget – Spend Like a Drunken Sailor
The 2020 budget was released yesterday. Now that we have had some time to digest it, I thought I would summarise some key points for you. You know what’s in the budget, so I thought I would focus on what’s not in the budget, and some likely outcomes of it.
- There are going to be no tax increases which will mean the government is spending more and consumers will have the same take home pay to spend. Well, those on salary at least..
- There are no structural changes to our welfare system or any economic reform. Good, the government are leaving things alone.
- No austerity measures to help pay for the spend up. They are not giving with one hand and taking with the other…
- There is no helicopter money, good, as we probably wouldn’t spend it.
- There is no business growth strategy
The budget is looking to focus on:
- Social issues such as housing with funds being pumped into creating more housing. Can’t argue with that as we need more houses. Just don’t try and do it yourself.
- Infrastructure spend on roading and rail
- Job preservation through the continued wage subsidy and allocation of funds to “shovel ready projects”
- Training, this will be vital as displaced workers may need to transition into different industries. Especially those in tourism as the sector looks to rebuild.
- Green jobs. Not sure what that means, maybe a whole lot of people dressing up as the incredible hulk to perform at kids parties?
- Increased quantitative Easing
From the budget, treasury has predicted that these actions will lead to growth of the economy and retain or provide 140,000 jobs over the next three years. They see unemployment increasing to 7.5% into the middle of next year before starting to turn. The government expects unemployment will get back to current rates by 2022.
So, what does it mean for you?
Well firstly, as an investor quantitative easing has historically lead to higher asset prices. Firstly, in businesses (shares), then property. Great you say, but what is quantitative easing again? The government issues debt in the form of bonds to pay for all this spending. Normally investors that have a low risk tolerance buy it. Instead, the reserve bank swoops in and buys the bonds. Investors are left with their funds sitting in the bank in a low interest rate environment. They are forced to look for other assets and supply funds to the market for other uses. Alternatively, investors just spend it. So, it creates demand for investments that provide a higher return and pushes prices up. Effectively it puts more money into circulation when it is needed.
The focus on job retention and re skilling is good in the short term. However, without any business growth strategy, I am concerned about the sustainability. For example. If I have just lost my job I could go and retrain as a builder with a free apprenticeship. With banks turning off the funding taps on property development finance there is likely to be some shrinkage in that sector. Will small builders, electricians and plumbers look to take on more staff? I think not. A plan is required.
Overall, I think the budget is positive. The details are yet to be revealed about the 20 billion dollar slush fund that they have at their disposal. Hopefully, that will form something of a business growth strategy rather than a lolly scramble before the next election. Not that I expect the government to come up with a business growth strategy. However, I do expect them to create an environment for business to excel which would simply involve them working with the business sector, creating a way forward together.
Personally, I would like to see the development of highly functioning capital markets. New Zealands small businesses have to rely too much on growingly conservative banks or retained earnings for funding growth. Maybe that could form part of their plan?
- Posted by Isbister
- On May 15, 2020