Markets missing some local news

Prime Minister Gillard has been saying it, Treasurer Swan has been saying it, Finance Minister Wong has been saying it. But it seems not many are alert to what is a very simple message.

There will be spending cuts in the context of the Mid-Year Economic and Fiscal Outlook (MYEFO) and the Government will do whatever it takes to deliver a surplus in 2012-13 - and I note also a surplus in 2013-14 is essential for political and economic reasons.

The adroit Malcolm Farr, National Political Editor for news.com.au seems to have captured the message in his piece today which highlights the fiscal task for the Government in the MYEFO. Farr picked up the point made by Mr Swan in his Economic Note over the weekend that "Our record of fiscal discipline helps underpin confidence in our economy and supports job creation. It also gives the Reserve Bank room to move lower on interest rates, as we saw earlier this month".

While there is more to interest rate setting that the stance of fiscal policy, a tight Budget at a time of trend or slightly below trend growth will allow for monetary policy to be easier than otherwise. This is why there seems to be few risks to a forecast of a 3.5% cash rate from the RBA by the middle of 2012.

The Government's improved fortunes in the very recent polls has many owners - but I reckon the interest rate cut on 1 November would be high among the issues clawing back support for Prime Minister Gillard and her Government. More interest rate cuts just might lock in those gains or build upon them over the next year or so. A tight budget and lower interest rates are a great foundation for electoral support.

An aside as to why that 2012-13 surplus is politically as well as economically essential. On the high probability of an October 2013 election, the Budget outcome for 2012-13 will be announced in August or September. The economic kudos from announcing a Budget surplus just weeks before polling days could or should be a game changer. It would further knee-cap the Opposition and its claims of economic credibility fall short. It would focus how the Government has managed fiscal policy over a 6 year cycle - with deficits when needed during the GFC and surpluses when better conditions prevailed. You cannot do any better than that! Just ask the Europeans, Americans and Japanese, many of whom may never run a Budget surplus again.