A lot of normal, non-economically trained Aussies might think this is a Voodoo Economics Bugdet — the Treasurer cuts taxes, tax collections go up and down goes the Budget Deficit, like magic. But in fact, this is an acceptable piece of economic logic.

Sure, it’s an election Budget but, fortunately, the demands of the economy also match the needs of Malcolm Turnbull and his Government.

We all need economic growth and more jobs and this Budget will help deliver exactly that.

The purists out there, like my old UNSW colleague Dr. John Hewson, have called it “the mother of all political budgets” but it has history with politics and budgets.

Dr Hewson’s famous ‘Fightback!’ election polices, which featured a 15% GST, was so economic and so un-political that he lost the un-losable election to Paul Keating, who called that win the “sweetest victory of all!”

Usually I’d argue good politics is bad economics but, right now, this is both good politics and good economics.

We’re living in an odd economy where there are jobs (431,000 in a year) but we’re not growing fast enough (over 3%) and consumers aren’t spending enough because wages aren’t growing quickly enough.

Fortunately, business is hot to trot and really confident. We got this message from NAB’s respected business survey only yesterday. The business conditions index rose to a record high +21.1 points in April, up from an upwardly revised +15.4 points in March (previously +14.1 points). Meanwhile, the business confidence index rose to +10.1 points in April from an upwardly revised 8 points in March (previously +7.4 points).

 

And the mere talk of tax cuts led CommSec’s chief economist, Craig James to tell us this about the consumer: “Ahead of the budget, consumer sentiment is over nine per cent higher than at the same time last year,” he pointed out. “Clearly, talk of tax cuts is cheering Aussies, despite the knowledge that the actual cuts may be quite modest. Still, Aussies are no doubt happy that the budget situation is improving. On top of this, the share market has been lifting.”

Jobs have helped consumer sentiment, as this graph shows:

This shows how consumer sentiment has trended up since jobs started falling out of the sky and right now, more economists are arguing wages are starting to rise more convincingly but the Reserve Bank wants to see more wage rises. And this Budget will help.

If the Budget helps to increase consumption and helps jobs creation, then the demand for workers tightens the job market and wages rise. Yep, it could give Malcolm Turnbull votes as well. However the more important goal is to create more jobs and higher wages and this will actually shrink the Budget Deficit faster than it would if Scott Morrison played a John Hewson game.

The time for a tough Budget will be after the next election, when the economy is growing at a rate over 3%. And that’s when the economy won’t need a helping hand from whovever is the Treasurer then.

I always test a Budget on whether I believe the forecasts and assumptions upon which the numbers are based. Here they are:

Forecasts

      Deficit               $18.2B   $14.5b

      Ec. Growth         2.75%        3%

      Unemployment    5.75%      5.5%

      Inflation              2%          2.25%

      Wages                2.5%          3%

And they’re all pretty well believable, though some economists would debate the growth guess and the wage rise number but I suspect they’ll be close to the mark.

This is the right political budget for a really unusual economic time!

Last year I called the Budget the “Beam it up Scotty Budget” and the Treasurer has been able to dial up growth and jobs, which explains why the Budget Deficit is shrinking at a faster than expected rate.

The tax cuts and other spending will give us the growth, which means more jobs and income, which gives the Government more tax collections and a smaller deficit. This is Voodoo Economics — tax cuts meaning more tax collected — explained!

Go Scotty!