Key Takeaways from the 2022 Federal Budget for Investors

Bryce: [00:01:10] Welcome to get started investing in this podcast, we cover all the basics that you need to start your investing journey. Are you joining us for the very first time? Is this the very start of your investing journey? Well, before you dive into this episode with us, our feed is designed to go from the very beginning, so we strongly recommend that you scroll up and start at episode one. Here at Jaci, we unpack all the jargon and the confusing bits. We hear your investing stories with the goal of making investing less intimidating. And of course, we want to have a good time along the way. My name is Bryce and as always, I am joined by my equity buddy Ren. How are you going? 

Alec: [00:01:42] I'm very good. Bryce. If people made it through that slog of an intro, the one thing to note we normally say Scroll up and start it episode one. But this episode is going to be a little bit topical because we've just had the federal budget I was, say, unveiled. I don't know if that's the right word or handed down. We've had the grand reveal of the federal budget and we're going to talk about it for listeners outside of Australia. Some of this not so relevant, but also, I think relevant because we want to just touch on does this matter for the stock market? Does this matter for investors and how does it matter for investors? And we are also going to be joined by the superstar economist himself, Thomas from comedian The Economist, former Reserve Bank of Australia economist, current podcast Superstar The best economist in the podcast game. People are saying so stick around for that. But Bryce bit of housekeeping first, 

Bryce: [00:02:38] a bit of housekeeping Ren two really exciting pieces of housekeeping. The first is that we have launched our latest show, Eighth Show in the network. It's called the dive and it's our take on business news. We know that the world of business is exciting and there's plenty going on, and three times a week we're going to be unpacking one big business news story, leaving the jargon at the door and keeping you up to speed with the fascinating world of business.

Alec: [00:03:05] We know it's exciting, and we don't think traditional finance media does a good job of communicating that, but more importantly, why it matters. So we're leaving the jargon, we're leaving the numbers. Will some of the numbers at the door? There will be something we sell, but no, we're not talking about day to day market movements here. We're talking about meaningful long term stories. We've been practising some of the recent practises. We've done Oskar's, the business of the Oscars. We've done how A.I. is being used to discover new drugs. We've done the BPP, the business of superyachts. We've answered the question Will I be in a self-driving car by the end of the year? 

Bryce: [00:03:42] Our sports teams are good investment. Yeah. 

Alec: [00:03:44] So look, a lot of big stories, a lot of interesting stories and not what you'd expect from your traditional business news. But hey, who says business news needs to be old business? 

Bryce: [00:03:55] But isn't it nice? So make sure you subscribe to that. Check it out. It's called the dive by Equity Mates Media, and we'll be launching that next week. So subscribe so you don't miss the first episode. Secondly, Ren, we have just announced the venue for Fin Fest and that is at the cutaway in Barangaroo. If you haven't been there, it's a massive, outsized underground cutaway into the hill at Barangaroo. Huge open space, quite architecturally magnificent, and it's going to be an awesome venue for Equity Mates to host our first major live event, which is Fin Fest. We're bringing together experts, we're bringing together entertainment deejays, food trucks, you name it, to create an event that will inspire you no matter where you are in your investing journey, give you the chance to hang out with other like minded people as well. 

Alec: [00:04:49] Look, if you missed Buddy Franklin's 1000th goal and running onto the field, you missed one of the, you know, the iconic Sydney moments for 2022. You'd be kicking yourself if you missed the second iconic Sydney moment, so sign up Equity Mates dot com slash fan fest and you'll be the first to know when tickets are available. 

Bryce: [00:05:10] That's it 15th of October 2020 to register now, so you get those early bird tickets. 

Alec: [00:05:15] All right, Bryce. We're talking about iconic moments. We're talking about, yeah, iconic moments, and there is no more iconic moment than the budget. And I've got to say Josh Frydenberg had an iconic hairstyle this year as well. No hair is beautiful. 

Bryce: [00:05:31] So the budget was announced this time last week, Tuesday evening. It's traditionally on a Tuesday and Friday. 

Alec: [00:05:40] We get some that it gets prime time billing, and I saw one of the headlines the next day, so it's like 7:30 speaks. Yeah, MAFS beat it in the ratings. Honestly, not surprised 

Bryce: [00:05:50] as a massive episode, anyway. So yeah, this time last week, the government stand up and essentially pitched to us what they're going to be spending for the 2022 2023 financial year. So we're going to leave a bit of the politics side out of it and this epic. So unpack what the purpose of the government budget is, how it influences economy and the stock market. Take a look at some of the key elements of the budget this year and then, as Ren said, check in with our chief economist Thomas to hear his thoughts. So let's start at the top Ren 

Alec: [00:06:26] so Bryce two pieces of jargon right at the top. Yeah. Fiscal policy and monetary policy. Yeah. Explain it to me in a way that doesn't make me turn this podcast off and go and listen to another one. 

Bryce: [00:06:38] Sure. Both of those are policy measures that a government can utilise to influence the economy. Fiscal policy is how the government spends its money and how it uses tax as a way to influence the economy as well. So it's government spending and tax policy. The second is, monetary policy might be a bit confusing as we've just spoken about spending and tax, but monetary policy talks about and influences interest rates. It's how the government uses interest rates to manipulate economic activity and to influence how much money is out in the economy, the money supply and the reason money supply is important. There's lots of money sloshing around. It changes the dynamic of demand and supply and what we can do and spend with our money. So. 

Alec: [00:07:30] And confusingly, how expensive money is 

Bryce: [00:07:33] exactly how expensive money is. So interest rates. So two key pieces of jargon, but key economic theory, fundamental theory. 

Alec: [00:07:42] I think the way to think about it, very simply, is monetary policy interest rates. The money supply is indirect. They change something and then that has flow on effects into the economy. What we heard last week from the government is a lot more direct. We're going to spend money on this. We're going to tax this. So fiscal, that's one way to think about it as well. That's fiscal policy. That's the budget. Now Bryce the next question. Does this matter for an investor? 

Bryce: [00:08:09] What which part both parts? Yes, the government saying that they're going to spend money and give everyone a support payment, for example, of $250 doesn't really have a direct impact on the stock market. Of course, you could deduce it back and say where we might go out and spend more on retail and then that has flow on effects to listed retail companies, and you could make those arguments. But what we're more interested in as investors is the monetary policy, the setting of interest rates. We know that interest rates have direct impact on how we value assets and how we value our investments, but also the cost of money, the cost of doing business or those sorts of things, 

Alec: [00:08:54] which can be confusing because you just said it has a direct impact and I call it indirect. 

Bryce: [00:08:59] On the stock market, 

Alec: [00:09:01] well, I think at a high level, when monetary policy changes, when the supply of money is changed and when interest rates change, the stock market cares a lot. Everyone use a whole bunch of articles written about a whole bunch. People talk about it. Stock prices move when the government hands down a budget, the majority of the stock market shrugged their shoulders, and there's a bunch of articles written with a real political focus. But I guess, like the Bloomberg's of the world, probably write a couple of articles, but then quickly move on with whatever the news of the day is. I think at a higher level, you can say that the market cares more about monetary policy than fiscal policy. 

Bryce: [00:09:40] Yeah, it's all interlinked. 

Alec: [00:09:42] But the second part of that is that the budget can have very specific impacts on very specific companies, so the market as a whole might shrug their shoulders a little bit and move on. But investors in specific companies or specific industries care a lot. 

Bryce: [00:09:58] Defence spending, for example.

Alec: [00:10:00] Well, that's a great example from this year. So why don't you set that up with what happened and then hit us from there? 

Bryce: [00:10:06] Sure. So one of the takeaways from the budget is that the government will be increasing defence spending by $2.8 billion to $48 billion. Now this is to increase the number of people in our army uniformed personnel by eighteen thousand five hundred to 80000 by 2040. So it's a huge increase and they're going to spend an additional $38 billion over the next 18 years. Pretty significant, although 80000 relative to some other armies around the world. 

Alec: [00:10:41] Well, do you know how Big China's army is? 

Bryce: [00:10:43] It's like a couple of million, isn't it? 

Alec: [00:10:44] It's 2.2 million active personnel and 1.2 million reserve. It's crazy, 

Bryce: [00:10:50] crazy. They're going to double the size of the Australian Signals Directorate with an additional nine point nine billion. So how does this relate to the market? More money coming in from the government into govt, into defence spending? One way to look at this would be to see which companies that are listed have contracts with government departments that are involved in defence. You could likely assume that over the next 20 or 30 years, if the government are going to be increasing spending, they might be able to get larger contracts and thus I do better. 

Alec: [00:11:28] Yeah, more money in the space means more potential to take some of that money. And then if you're in Australia, there's a bunch of ASX listed defence stocks that could benefit or still a shipbuilder electro optic systems. That one gets a bit of buzz in the Equity Mates community, but a bunch more that you can do your own research on and have a look at. So, you know, the market as a whole might shrug, but the defence investors in the defence sector might get excited. I would wait and see if the companies that you like actually do get any of that money before you get too excited because who knows where that money actually ends up? That's that's the second part of this equation. But hey, $2.8 billion is $2.8 billion. Nothing to sniff out, you know? So that's when the government gives money on the same side. The market cares if tax policy really affects a segment in Australia. About about ten years ago now, there was a big political fight over a resource super profits tax, and that was basically Australians love mining. We are a mining, we are a resource rich country, and the government wanted to take some of the excess profits that the mining industry were making. That obviously affects mining investors because the profits that the companies would be making would be losing more of that in tax. So I think in a general sense, if we want to start by answering the question, how much does the market care about what governments do? The market as a whole cares about monetary policy, interest rate settings and the supply of money. The specific segments of the market that are affected by government budgets care about fiscal policy. 

Bryce: [00:13:02] Nice. Well before we chat to Thomas. So we've spoken about defence Ren. Were there any other sort of key elements that we should highlight before getting a bit more detail from Thomas? 

Alec: [00:13:12] Well, I think cash in pockets is a big one. This was a pre-election budget and you can tell what the election is going to be fought on here in Australia. The defence spending isn't an accident. The defence spending is because they want it to be a battle line. Yeah, and cash in pockets is cost of living pressures, a big price of fuel price of food. All of that is going up. So a $9 billion package to one cut the petrol excise by 22 cents a litre for the next six months, which basically means for the next six months, you get 10 per cent off a litre of petrol 

Bryce: [00:13:43] if it's sitting at two bucks. 

Alec: [00:13:45] Well, it's yeah, I mean, it's around that $2 20 mark now, so it's 10 percent off for 10 million Australians low and middle income earners. They'll get a one off tax rebate of $420. And then another six million Australians will. Get a one off two hundred and fifty dollar payment. So cash in pockets now. So then you ask, Well, who's that money going to benefit in the stock market? Like what companies are going to benefit? And you would say consumer staples. I think the cost of living is going up. This money is to help people afford the necessities of life more than, you know, any discretionary spending, upgrading their phone. You could stuff like that. So it'll be the staples, it'll be food, electricity, fuel, stuff like that. You look at companies like, I guess, Coles, Woollies and Metcash, but I think the important thing is it's a one off payment. Yeah, it's a six month cut to the fuel excise. You wouldn't make any long term assumptions about companies. I didn't look, but I would hazard a guess that Coles, Woollies and Metcash, their share price didn't move as a result of the budget. 

Bryce: [00:14:47] You wouldn't think so. No, I haven't had a look, but it's it's a it's short term, you know, good on the government.

Alec: [00:14:53] There's a bunch of other stuff. We put up an Instagram post about some of the stuff in the budget aisle, but I don't think we need to cover it more because Thomas, it will do a far better job of explaining it and giving his thought. So let's have a quick break and then get Thomas on the line. So we're joined by Thomas, the chief economist here at Equity Mates, the podcast host extraordinaire of Canadian economist. We hear the best economist in the podcast game and a former Reserve Bank of Australia economist. So, Thomas, there's no one better to join us today and give us the 101 on the budget. So let's start at the beginning. Let's start high level overall. What were your impressions of this year's budget? 

Thomas: [00:15:41] I think I think it's interesting like it. Zoom back out like you can kind of think about a budget being expansionary or contractionary, like it's a tool that the government has. It's a lever that they can lean on to either give the economy a bit of a pump or to slow it down a little bit. And in that sense, it's an expansionary budget. It's not massively expansion. It's not a, you know, it's not a disaster budget like Covid, where you had to spend big to get out of the trouble that was coming. But it's still expansionary. It's looking at like just seventeen point two billion there that they could have left off the table, but they decided to put in. It had the cost of living measures. That's 8.6 billion, or about half per cent, a half a percent of GDP. They didn't need to be there, either. Yeah. So broadly, it's a stimulatory budget. It gives the economy a little little pump of the accelerator pedal. The interesting sort of thing for me is that it's not clear that we really we really need to be pumping the accelerator pedal right now. In the forecast, we've got unemployment rate going to three point seventy five percent, so that's the lowest level since the 1970s. Investments are the commodity booms in full effect. Wages growth is expected to pick up. They often miss on that forecast, but that seems like it's pretty likely given how tight the labour market is. When you got a tight labour market that reduces the welfare spending that you've got to pay, like not paying out unemployment benefits. That's good news for the budget and good news for the economy. So it's not it's not clear that we need to be pumping the accelerator pedal from the from the data that we've got, but that's that's sort of where we got. And in that sense, it's a classic election budget. It does seem to be aimed squarely at winning some votes. 

Bryce: [00:17:19] Yeah. So no surprises on that front. But were there any surprises once you dug into it a little? Or do you feel like this was what we were to expect at this time of an election campaign? 

Thomas: [00:17:32] Yeah, I think so. I mean, there weren't a lot of surprises in the most of the most of the measures were flagged well ahead of the release of the budget. Just to sort of try and capture that, that good news story effect and get some get some time free of the budget. Yes, and nothing to the senses. It's responding to them to the challenges of the day so that the petrol, the cut to the petrol price excise, the cut cut that in half. That's going to put money in consumers pockets. But that's really a phenomenon that's driven by the current two months, not the recent recent two months or so with the war in the Ukraine. It's not a long term structural issues, sort of. It does seem to be aimed squarely at the moment. It is the budget that's living in the moment. I mean, the big one for me, having just been through the floods up here in northern New South Wales is it's very it's, you know, there's almost no mention of climate change or climate action when you renew economy, they reckon the climate action in the budgets decreasing thirty five percent over the next four years. So there's nothing there. Personally, I find that a bit disappointing. 

Alec: [00:18:35] We we definitely echo that the the cuts to the clean energy agencies is is is pretty disappointing. The big, you know, the big long term spending commitment is around. Defence was, as you know, as investors, as citizens in Australia. Is that something that will say any, you know, flown effects into the economy more generally or into the stock market? Or is that going to be a sort of contained in the world of defence?

Thomas: [00:19:05] I think it's interesting in the sense, like it's not hard to sense. So there is thirty eight point thirty eight billion to expand the number of soldiers personnel in the Defence Force. That's over twenty years. That's not massive over that time horizon, but still beefing up those numbers. What's interesting, I think, is you've got the cyber security aspect, the Projekt Red Spice that they're calling it. That's good. Yeah. So that's got 10 billion over 10 years. So that's looking at cyber, data science and intelligence as nineteen hundred new jobs at ASIO. That's sort of interesting in the sense, like we're we're beefing up in the cyber security space. And that's that's an area where you could expect to see some bleed between the public sector and the private sector. That either that the government falls in consultants with expertise in cyber security like Adam might just drop that my brother co-host, it's he's open to offers if there's a good something good on the table. Yeah. So so that might that might boost beef up. Some, like if some domestic firms get contracts out of that, that could be a good news story for some of the players and on the ASX. And yes, it feeds through its rules, it has a more sort of transmission mechanisms that I see into the broader economy than, say, building tanks or submarines, for example. So maybe, maybe that's a good news story there. 

Bryce: [00:20:24] Well, if Adam disappears from the pod, we'll know that he's definitely working in intelligence service. 

Thomas: [00:20:28] Yeah, yeah, yeah. 

Bryce: [00:20:31] So, Tom, it's a question that we were just unpacking a little before you came on was how much the budget actually matters on two fronts firstly for sort of general economic activity and then relating it to the stock market specifically. So if you could help us unpack those, does the budget matter? General Economics 101 and then, you know, when when they announce it, Frydenberg stands up there. What what is the market generally doing? 

Alec: [00:20:59] I'm pretty confident Thomas is going to tell us the budget matters because it's the economist's night of nights. It's it's the state of the economy. 

Thomas: [00:21:08] Yeah, yeah. I mean, it's a little bit like the Oscars, to be honest. Like, it matters because we think it matters and it has all these nice ramps that we can report on, and the leading economists and journalists can work themselves into a lather over the details. But I don't know that it matters all that much. I think we, my my, my feeling is we tend to overstate the role of federal government in managing the economy. I think the idea that the government is economic managers, I think, is a bit of a is a bit of a myth that politicians like to sort of keep trotting out because it makes them relevant. So yeah, it's it's definitely not like it's not the case that, you know, Josh Frydenberg and Scott Morrison are at the helm of the economy and driving the economy. And you know what they do matters. But it's they're not managing the economy in the way of managing a CEO is managing a company. So there's a bit of a myth out there about how much it matters. That said, it's still, you know, like the current budget's three point four per cent of GDP. So good way to think about that is if all the budget disappeared and there was absolutely no government spending, you'd have a three point four per cent fall in the economy. That's pretty substantial. It's pretty massive, but it's never going to happen because a lot of the government features are sort of locked in. A lot of the administrative stuff the government does, isn't discretionary, is sort of just has to be there. 

Alec: [00:22:28] That actually feels quite small to me. I would have just assumed the number would have been a lot larger. Hmm. Now I'm thinking it's even less important that I watch it. 

Thomas: [00:22:37] But yeah, you could go that. I mean, I'm talking. So I'm talking about the deficit of 3.4 percent. Like, not that's not the public sector. The public sector itself is much bigger, right? Yeah, yeah. Yeah. But the difference and the difference between, you know, so it's three point four, the deficit three point four percent now it's shrinking 2.7 per cent by over the forecast horizon, which is up to twenty four twenty five. So that's a sort of the three percent difference, more or less. So that's you see you taking it, you are on on the basic budget numbers. You are taking three per cent out of the economy over four years. So yeah, it's not massive. It's not massive in that sense. 

Alec: [00:23:15] Now, Thomas, we don't want to get political here. But one big takeaway that we had wasn't so much in the budget numbers themselves, but what was in the budget numbers? If we go back a few years, there was a lot of debt and deficit rhetoric in from liberal treasurers that isn't so much there anymore. Any thoughts on the changing of the tone, I guess you could call it. 

Thomas: [00:23:38] Yeah, it is interesting. Josh Frydenberg was famous for his back in black and back on track, I think is one of his first budgets. I wonder if he 

Alec: [00:23:48] came up with that himself or he outsourced to a marketing agency. 

Thomas: [00:23:54] It felt like it came from Candace, didn't it? Yeah. I don't know if that haunts him. I guess the public's got sort of limited memories because it's now we're not getting back in black to lay down the track now, and it's like ten ten years of budget deficits. And this is another case where I think the politicians overplayed the importance of the deficit. And this sort of the the classic mistake is saying that the government is like a household. And then if a household has too much debt, then the household is vulnerable and it can get into trouble. And that's true of the household. But it's not true of a government that has the ability to just print money and make up money on the spot and continues to issue debts in its own currency and then can just print money to pay those debts. So it's not to say that it doesn't matter, but it's just it's just a very different beast. And the analogy with the household and household financial position just isn't. Isn't that useful? And there has. There has been a seismic shift in the way politics in particular. Economists were more flexible around this, but politics in particular, it was all about the budget surplus. You know, governments used to, particularly from the Howard era onwards, were really hanging their hat on their ability to deliver a surplus and regardless of the economic conditions. And that sort of now Google gone out the window. I mean, one. It's impossible now, like it would be incredibly difficult from the current starting point to deliver a surplus, a surplus over the forecast horizon. So that's obviously why you're not making a big deal about it. But to we've we've just been through an experiment where over the past two years, every major developed country has run a massive budget deficit. And it's by and large mostly been, OK, you know, things haven't crashed. It hasn't created huge amounts of drama. We do have some inflation in the system, but it's still not clear that it's from its demand demand pool rather than supply shocks and costs push inflation. Yeah. So it's sort of been doing this really interesting experiment where we've run massive deficits all over the world and by and large, it's been all right. So I think, yeah, that bogeyman is not going to have the fear factor it used to nice. 

Bryce: [00:25:59] Thomas will thank you so much for giving us your time today to unpack that anyway. We know that you are up in northern New South Wales going through the floods up there and obviously we're thinking of you and certainly appreciate you taking the time to come on and help us unpack this all. We'll leave it there. Shout out to our community that if you want to hear from more from Thomas and his brother Adam, as they unpack everything that's going on in the world of macroeconomics, make sure you go and subscribe to Comedian V Economist. It's it's an epic show. 

Alec: [00:26:35] Look, I'm going to say they're the only podcast out there that can explain why Twiggy Forrest is Elon Musk's dad. And then and then you go into a discussion on why rent increases lead to house price increases. But house price increases don't lead to rent increases. A great mix of information and a bit of fun, so definitely go check it out. 

Bryce: [00:26:59] Thanks, guys. Awesome. Appreciate your time. Thank you, Thomas. 

Thomas: [00:27:03] It is always a pleasure.