Weekly Wrap by Pythagoras Investing: Too much stimulus or too little?

Today I wanted to discuss the twin stimulus’s I referred to last week in my blog which can be found here.  Unfortunately, the US negotiations are still unresolved.  However, in Australia the Treasurer has delivered a budget with a focus on injecting money into the economy with the objective of creating jobs.  Although the expenditure outlined was about $100 billion, 3 major areas account for a massive $50 billion.

Asset Write-offs

Enabling businesses to deduct the full cost of new capital assets. This measure extends the current instant asset write-off concessions which were introduced as part of the Government’s measures to support businesses to withstand and recover from the economic impacts of COVID-19.

The aim is to stimulate business investment and lead to confidence.

The cost of this initiative is expected to cost the government $26 billion in lost taxes.

Business Concessions

The Government has announced a temporary tax relief by allowing eligible companies to carry-back tax losses made in the 2020 to 2022 income years to offset tax paid on profits from the 2019 income year onwards.

The aim is to put money back in the pockets of companies which will encourage confidence and growth.

The cost of this initiative is expected to cost the government $5 billion in lost taxes.

Cuts to personal tax rates

The Government will bring forward the second stage of its Personal Income Tax Plan by two years to 1 July 2020 while retaining the low and middle income tax offset for 2020-21.

It’s planning on back-dating the cuts to July 2020.

  • People who earn $45,000 to $90,000 will end up with up to an extra $1,080 pa.
  • People earning more than $90,000 will be taking home up to an extra $2,565 pa.

The aim is to provide immediate relief to individuals and support economic recovery and jobs by boosting consumer spending.

The cost of this initiative is expected to cost the government $18 billion in lost taxes.

Will the budget work to get us through the recession?

The key assumptions underlying the budget are all based on types of confidence:

  1. Confidence that the public spends the money and doesn’t save it.
  2. Confidence in the outlook so companies feel confident to invest and hire staff.
  3. Confidence a vaccine is found, the population is vaccinated, and the virus is controlled.

There can be debate at every point – but what choice do we have?  We need to try to get back up and running.  Once confidence starts and is maintained, the assumption is that market forces will take us up and away.  The coming 12 months looks full of stimulus, the 12 months beyond is relatively vacant.  This plan is as good as any in the past, as it is a copy of most of what has been done before by both sides of politics – with every chance of success.  There will be concern about the government debt levels as they are significant and growing.  But the cost to service it is exceptionally low and interest rates aren’t going to rise much any time soon.

We have recovered from recessions in the past.  Australia has excess capacity available to produce more, very quickly.  The coming 12 months is critical to see confidence not only begin but build.

The effect on the stock market

Stock markets love it when there is a flow of money into the economy.  They also love it when less money is getting taken out. 

In this budget we have both – big spend and reduced taxes.  If jobs do begin to return, we should be in for a strong period of economic growth in Australia.  If not there is room to add more stimulus over time – particularly as the next budget is May 2021. 

We will know in 2-3 years if this budget was too much or too little. 

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