A Winning Trifecta Week for Australians

It’s been a triple bill week for Australia this week: Federal Budget, RBA Rate Cut, Double Dissolution of Parliament.

A Vanilla Flavoured Budget

The Honourable Scott Morrison has delivered a minimum target Federal Budget that displeases no-one to any major degree – a budget that will most likely ensure re-election of the Coalition at the upcoming Double Dissolution election.

It is a minimum target budget in the sense that various lobby groups and special interest groups have little to aim at. Most importantly, neither does the ALP.

While various grand-standing points will continue to be made by the Opposition, the reality is that given close, if not perfect, polls over voting intentions, the gap for preferred Prime Minister is compelling. Even though people may register their long term party bias when asked “which party would you vote for?” they give away their real intention for election day with their response to the question of “preferred PM”.

Basically the government has sought to deliver a non-objectionable budget so as to achieve a real mandate at the election. I have mentioned before that the current government does not yet possess a mandate from the people, and desperately needs one for credibility purposes. It will be able to step up the pace and achieve real reform as the country so desperately needs, once it has that clear mandate.

Bring on the election and a coalition victory! The last thing we need is an ALP government messing around with negative gearing. That would undermine the entire economy overnight.

Hence, the budget just delivered is a great relief in more ways than one. Confirming a low profile budget has not only ensured a return of the government, but also an entrenchment of negative gearing as a principle in this country. Therefore it is a budget to truly celebrate.

Interest Rates Dip to their Lowest

The Reserve Bank of Australia finally cut interest rates! But only by 25 points to 1.75%. Really, it should have done 50 points to have an impact toward correcting the past errors of remaining way too high for way too long. In fact, all Glenn Stevens and the RBA have done is what all Australians have known needed to be done for quite some time. It’s been a scandalous delay.

When the RBA was hiking rates during the GFC (the only bank in the world to do so, thereby confirming its status as the dumbest central bank in the world) it created a mountain of pain all Australians did not need. From 3.00% to 4.75%, back to 2.00% and now at last to 1.75%. This is an institution so steeped in history, it is little else but prehistoric.

While gratitude may be expressed by some, I see no reason for anything but rage at the incapacity of the RBA to understand contemporary economics. Quite sincerely the RBA is at least ten years behind contemporary economic thought. By any modern central banks’ standards, it is an absurdity. Credibility must be demanded more strenuously than the occasional Senate committee discussion. I will be pushing the Prime Minister on the necessity for the Governor to be appointed from outside the bank, post the election. Things have to change. Let’s hope that they will.

So in a snap the RBA cut rates to 1.75%. Some, possibly all, will be passed on to customers by the banks. For the RBA this move is way behind the curve, and rates as we have been saying all along, should have been at 1.50% for a year or two by now. So the RBA still has more to do.

An Imminent Election

The third aspect of the triple bill, is the upcoming Double Dissolution election announcement. The Prime Minister will approach the Governor General and a double dissolution election will likely be announced this weekend.

The significant upside of this is, as I said, the likely return of the government with an emboldened reform agenda on top of a more compliant Senate. Compliant may be the wrong word, as we never really want an easy Senate environment, but we certainly badly need an effective, functioning Senate. We need a Senate that understands and addresses the issues and that respects and represents the will of the people - something we do not have at the moment.

So it could be a major week for the country as a whole, with a well targeted budget to increase the confidence of small and medium sized business, as well as return to government, a rate cut not to be sneezed at, and the announcing of that all important, mandate election!

All of this without question is supportive of an on-going strong property price environment. Believe it or not, it is good news.

Clifford Bennett

International Economist