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Leadership Failings Threaten Markets

We’re only a few weeks from the next Federal Budget and already the omens are not good. Due to the slump in commodity prices, and ongoing general weakness in the economy, we know that the Budget will contain another confidence jarring write down in government revenues. Prime Minister Tony Abbott this past week hinted the loss could be around $30 billion over the four year forward estimate period.

What’s less clear is what the Government will do about it. The Abbott Government has trotted out a confusing array of mixed messages in recent months. It spent millions promoting the hopelessly flawed Intergenerational Report, which seems to have done little other than to suggest to Australians we have a massive looming fiscal crisis ahead of us - which is all Labor’s fault.

In reality, the situation is not that dire - in fact, the long-term budget outlook has actually improved in recent years due to a pick-up in birth rates, immigration and workforce participation among older workers. Even the Report’s chief spokesman - Dr. Karl - has repudiated his support for the political hatchet job, after admitting he had not actually read the report.

But fomenting an environment of crisis would not be so bad if it then encouraged the Government to make some tough long-term Budget savings. But within only a few days of the Intergenerational Report’s release, our PM was out suggesting a rise in government debt to 60 per cent of GDP – almost six times current levels - would not be so bad, and much better than in Greece! He even suggested the Budget would be “boring”.

The Government then launched the Tax White paper, which has attracted more confidence jarring headlines by suggesting the goods and services tax rate may need to be increased, and superannuation perks and negative gearing provisions wound back.

Again, this would not be so bad if the Government actually did something. But although we’ve had the threats, and there will likely be very little to show for it in the Budget. At most, the Government seems to be readying itself to scale back the degree to which richer retirees can get access to the pension - a commendable but very piecemeal move.

Under the ill conceived guidance of the tight-fisted Treasury Department, Treasurer Joe Hockey is still trying to foment a “budget crisis” mentality, in the vain hope of encouraging his colleagues to agree to tough budget cuts that the Prime Minister clearly has not stomach for - especially now that his own hold on the leadership remains under continued threat.

So it’s all threat and no action. The Government seems hopelessly confused as to what it wants to do. And with the Reserve Bank still dithering over whether to cut interest rates further, it’s no surprise that consumer confidence took another tumble last month.

If next month’s Budget message is as bad as I fear, and the RBA again baulks at cutting interest rates, there’s a very real risk both business and consumer confidence sink further in coming months - which could in turn force bullish equity investors to reconsider. Although interest rates remain low, corporate earnings expectations remain under downward pressure, and share market price to earnings valuations are reaching uncomfortable high levels.

To my mind, this is not a time to be pouring a lot of new money into the market. And in fact, it may be time to take a few bets off the table and batten down for an at least 10 per cent market pull back over the next three to six months.

View More Articles By David Bassanese

David is one of Australia's leading economic and financial market analysts. His is Chief Economist with BetaShares, and an Economic Advisor to the National Institute for Economic and Industry Research (NIEIR). His has held former roles as senior commentator with The Australian Financial Review, Macquarie Bank interest rate strategist and Federal Treasury economist. He is also author of the online e-book, TheAustralian ETF Guide.



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