34: 2022 Federal Budget Demystified Without The Politics

2022 Federal Budget Demystified Without The Politics.

Welcome to the Burgernomics episode where the 2022 Australian Federal Budget is demystified without the politics.

Okay, the first thing to understand are the three types of Federal Budgets. The most common is a Budget deficit, which is when the government plans to spend more money that it receives through taxation. And thats what was announced last night, $37 bn will be spent more than is collected through taxes.

Where will this money come to make up the difference?

There’s a government department called the Office Of Financial Management.

Basically the treasurer rings them up and says, “I’m short $37 bn to run the country this year based on my spending promises. Can you please get your ink jet printer to print some certificates on thick paper with lots of fancy scrolls and official looking seals and auction them to financial institutions for billions of dollars?” What we are talking about here are treasury bonds which are basically ious’ from Australia’s Treasury to pay for our deficit. Institutions want them because the treasury pays interest to the bond holders.

Adding up the ious’ needed to fund those deficits comes to more than $963 bn, it will hit $1 trillion dollars if it hasn’t already. Thats approx half the value of all companies listed on our stock exchange. The yearly interest bill paid to the holders of the bonds is $18 bn. Thats $700, for every man woman and child living in Australia.

Now important point, a budget deficit increases economic activity, increases the need for  employment, increasing the amount of wages, which increase the demand for goods and services which, in turn increases inflation. Currently Australia is at full employment, and has rising inflation.

The second type of budget is a surplus, which you have already guessed, means the government isn’t planning to spend all the money they have received in taxation.

A budget surplus goes toward repaying the government nearly $1 trillion debt, another way of saying paying pack the ious’ when they become due for repayment, rather than having to issue more ious’ to pay for the maturing ious’ which have previously financed deficit budget deficits.

The last time there was a surplus was in the 2007/8 financial year.

Budget surpluses decrease economic activity, reduce employment and as a result, not as many people are receiving wages, so consumption of goods and services fall which reduces inflation.

Thirdly there is a balanced budget. This is when the government plans to spend exactly what it receives in tax. Balanced budgets keep employment and inflation where they currently are.

Now this bit is really important, the name, The 2022 Federal Budget

It’s a budget, that means all the figures are projections, estimates, guesses,

Yet the media cut down whole Brazilian rainforests to print newspapers treating every figure as sacrosanct, as if these numbers will be delivered upon...getting everyone pumped up as to wether the numbers are fair or not. Thats great for tv ratings, newspaper sales and all us economists because it makes us look smart commenting as if what is in the Budget will actually happen.

Budgets are usually delivered in March with a revised budget later in the year.

What actually is spent and received by the government, is published a few months after the end of the following financial year.

So in the 2021 Federal budget which predicted a deficit of $80bn and was described as economically irresponsible by Labor Party or a wonderful piece of financial management if you were in the Liberal Party.

But when the actual income and expenditure numbers came in, they added up to a deficit of $32 bn  not the predicted $80bn, thats a $48bn difference, or the equivalent to the whole  of the Australian defence budget....a 60% variance to what was originally forecast on budget night.

So that makes the hot air expelled by all the commentators, economists and political parties the morning after the last March budget...just that...hot air.

Politicians and the treasury department can’t predict, wars, overseas famines, pandemics or political situations such as trade tariffs that will make any budget figures meaningless over a 12 month period.

Take the 2019 Budget for example. It predicted a $7.1bn surplus yet we actually ended up with a $85.3bn deficit thanks to a pandemic.

So treat the 2022 budget as a hope, a wish, maybe even a prayer as to how the government would implement its election promises in a world where nothing changes.....which, of course, has never ever happened!

If governments were to change their budget expenditures or tax rates, without the justification of global events such as wars and pandemics, then the media and opposition political parties go ballistic saying the elected govt have ‘backtracked on election promises’ even though the government is simply reacting to changing circumstances....as they should.

Every government will tell you the main aim of their budget is to keep all Australians standard of living secure.

Our standard of living relies on two types of economic policy.

Monetary policy, as implemented through Australia’s politically independent, central bank, the Reserve Bank of Australia, so think interest rates and money management.

And the second policy is fiscal policy which is implemented through the elected government, based on their political promises via the annual budget presentation and budget update later in the year.

So health, and defence  are obviously part of every federal governments responsibility. But a secure standard of living is as much about making sure everyone has a job, giving us the money to buy the goods and services we can afford.

Currently unemployment in Australia is at 3.5%, thats full employment

Every Australian who wants a job has a job

So why run any level of budget deficit which creates more jobs and more wages if we already have’t enough workers?

The answer, to fulfil election promises, even if, by fulfilling those election promises it adds to inflation.

It’s interesting that the forecast (oh dear, there;s that word again) is for a slowing economy over the next 2 years resulting in 150,000 job losses.

We’ll even if that projection was true, we’d still be at full employment according to most economist definitions after loosing 150,000 and thats not taking into account the 200,000 migrants the government say will be landing on our shores looking for work.

The Reserve Bank is tasked by the government to reduce inflation from its current predicted high of 7.7% to around 3%

So the RBA  will need to keep putting up interest rates to achieve what the government has tasked it to achieve.

It’s a bit rich for a federal government, of any political persuasion to run a deficit to finance their election promises which adds to inflation, to then point the finger at the independent Reserve Bank saying, “Why are you making it harder for Australians by increasing interest rates so their mortgage payments go up?”

Yet thats what has happened many times in Australia’s history irrespective of whether Labor or Liberal were in government.

Now lets get to the core of the Burgernomics podcast, How will the budget effect hamburgers?

If the budget forecasts actually became reality (which has never happened in Australian history)

This budget deficit will support continuing inflation causing hamburger prices to rise.

The RBA will therefore need to keep increasing interest rates to reduce the predicted 7.7% inflation, sending it back to 3% That means less disposable income as everyones mortgage payments increase.

So if your family’s big night out, is dinner at McDonald’s you may not wish to expend your about to be reduced disposable income on hamburgers and instead stay at home eating baked beans.

Or, if you dine out slightly more up market than eating hamburgers, your reduced disposable income may cause you to drop down to hamburger dinners. So the 2022 Budget is a hamburger swings and roundabouts.

Hope you enjoyed the Burgernomics 2022 budget overview.

Please subscribe to the Burgernomics podcast if you haven’t already and tell your friends to have a listen for a different angle of the economic events shaping their lives.

#2022budget

#burgernomicspodcast

#federalbudget