A flood of leaks about the 2008-09 budget with expensive cars to be taxed more, relief for some for health insurance, more money for the environment, money to reform middle class welfare payments and possibly a means test, perhaps a commitment on paid maternity leave, and a tax review.
That tax review has already been overtaken in two small areas by the decision to lift taxes on cars worth more than $57,000, and higher excise on alcopops. As I said, small tax increases, but you'd expect a comprehensive tax inquiry would mean all tax rises are precluded.
As well the changes to the Medicare levy and private health insurance will have an impact on the health care sectort As well thwith stocks like Ramsay Health, healthscope, primary health Care and NIB affected. Today's meeting of MBF members to discuss a bid from BUPA Australia (from the UK), is likely to be impacted by the proposed changes.
But the tax inquiry isn't so comprehensive: it won't look at untaxed super, the GST or the increasingly costly tax concessions for superannuants 60 years of age and over awarded by the Howard/Costello Government.
Will it look at capital gains taxes and the way the family home is exempted, and will it look at the way negative gearing is distorting the housing market? On what was announced yesterday, it would seem so.
But while the budget will detail a lot of the fiscal and social policy of the Rudd Government, its economic forecasts will not be the guiding force for business and the economy.
They came out on Friday with the second Monetary Policy Statement of the year from the Reserve Bank.
The news wasn't very good and will force quite a few revisions to earnings estimates, especially for 2008-09
The RBA raised its inflation forecast and said economic growth will slow over 2008 and into 2009. Non-farm GDP is forecast to be at 1.75% at the end of 2008, a big fall on the 4% plus at the end of last year, and the best indicator of what the RBA is aiming to do with the domestic economy.
Interest rates could rise, but don't bet on it for a month or three or longer.
The Australian dollar finished at $94.36, up a third of a cent from Friday's close in Australia and about steady with the level before the release of the RBA update at 11.30 am Friday.
The RBA cut its forecast for growth in June 2009 to 2.75% from the 3% predicted in February. Gross domestic product will expand 2.5% in June 2010, compared with a previous outlook of 3%: it will fall to an annual year end rate of 1.75% at the end of 2008.
GDP slowed to 0.6% in the fourth quarter of 2007 from the previous three months, when it rose 1.1%. First quarter GDP figures are due for release on June 4.
In its second Monetary Policy Statement for the year the RBA had this to say about the outlook for the Australian economy.
The available economic data for 2008 suggest that a significant moderation in domestic spending is now occurring.
After strong growth last year, the volume of retail sales is estimated to have fallen slightly in the March quarter, and this has occurred against the background of a sharp decline in consumer sentiment. Indicators of housing construction activity have also fallen in recent months.
In the business sector, surveys point to a noticeable fall in confidence in early 2008, though trading conditions at this stage are reported to have softened only modestly.
Labour market indicators, at the time of writing, have for the most part remained strong in recent months, with employment continuing to expand in the March quarter and unemployment remaining close to recent lows.
Developments in financing activity and in the established housing market are generally pointing to more subdued demand this year. Housing loan approvals have fallen in recent months and, to a lesser extent, there has been a slowing in the growth of housing credit outstanding.
In the established housing market, auction clearance rates have fallen from last year’s high levels, while average house prices in the capital cities slowed in the March quarter after strong rises through 2007. In addition, after a period of very rapid growth, finance to businesses has slowed noticeably in recent months.
Hence, while it is still too early to gauge the full effects of the tightening in financial conditions, the evidence to date is that a noticeable restraining impact is being exerted on household and business borrowing and on overall domestic demand.
In assessing the outlook for demand and growth, an important countervailing consideration is the stimulus that will come this year from Australia’s rising terms of trade. Based on the latest contract negotiations for coal and iron ore, it is likely that the terms of trade will rise by around 20 per cent this year as the new contracts come into effect.
This is well above the average increase over the past four years, and higher than appeared likely a few months ago.
Given current capacity constraints and the large increases in investment that have already occurred, it is possible that the mining companies and governments that receive the revenue gains may find it more difficult than in previous years to make major expansions to their investment spending in the near term.
Even so, the projected increase in Australia’s terms of trade represents a substantial boost to national income.
Hence, in summary, prospects for growth of the Australian economy and for inflation will depend on the net impact of several contrasting factors, including the slowdown in the major advanced economies, the ongoing turmoil in world financial markets, tight domestic financial conditions and, working in the other direction, the forthcoming stimulus from Australia’s rising terms of trade.
Given the opposing forces at work, their overall net effect on demand and inflation is subject to considerable uncertainty. The recent evidence is that a significant moderation in domestic demand is now occurring.
The full effects of the recent tightening in domestic financial conditions are yet to become apparent although, on the other hand, the stimulus from this year’s terms-of-trade increase is also still in the future.
On balance, the Board’s assessment is that a period of below-trend growth in the Australian economy is now in prospect. If sustained, this will mean a gradual easing in capacity pressures, which in turn can be expected to have a restraining influence on inflation over time.
On this basis, while inflation is likely to remain high in the short term, it is forecast to start to decline towards the end of 2008, reaching a rate of around 2¾ per cent at the end of the forecast period.
This assessment would need to be reviewed if the expected moderation in domestic demand does not occur, or if expectations of high ongoing inflation begin to affect wage and price setting.
Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au
