How will stocks be affected by the so-called ‘budget blowout’? Its more complicated than you think

The term budget blowout has gone viral in the last week. It is not a new term, but it is a term that has been applied to the federal government following the Mid-Year Economic and Fiscal Outlook (MYEFO).

A budget blowout – really?

The underlying cash deficit was actually smaller than had been forecast in the May budget – $26.9bn vs $28.3bn. Nonetheless, after a couple of years of surpluses, it is easy to see a deficit of that magnitude as a blowout. But ultimately, the catalyst for the term ‘blowout’ was the estimates over the following years, being revised down by $21.8bn over the next 4 years.

There are many reasons for this but they all boil down to lower spending. Ironically, you cannot blame lower revenue necessarily because tax revenues (other than those linked to commodity prices) are rising. It is so-called ‘unavoidable spending’ and increases in government payments that get automatically indexed and will have more people on them over the next 4 years. The government has claimed that the budget has improved by $200bn since the last election.

So how will stocks be impacted?

It is difficult to tell overall. Business lobby groups have claimed Australia needs to cut the corporate tax rate, being uncompetitive to begin with and inevitably to be even moreso assuming Donald Trump follows through with his promote to cut America’s rate to 15%.

The key challenge for listed companies is the perception that the spending is adding to inflation and thus hindering rate cuts. Businesses will claim that consumer confidence is in a rut and point to Australia being in the worst per capita recession since the Great Depression, and government spending will hinder relief reaching Australians in the form of rate cuts. Beyond this, the delay of rate cuts will also impede the benchmark indices, and inevitably the bulk of the stocks in them.

Could any stocks benefit?

This being said, some companies could benefit from increased government spending accentuating from the ‘budget blowout’, dependant on which industries they are in and the specific spending measures impacting them. Most notably, businesses exposed to the NDIS which is still exploding even with efforts to reign it under control. Sadly, there are not that many stocks with exposure, but Freedom Care (ASX:FCG) is one of them.

Peter Dutton’s nuclear plan, whilst inevitably worsening the budget barring spending cuts elsewhere, could benefit uranium stocks, particularly those with projects in Australia. Without a substantial nuclear industry here, uranium stocks are reliant on foreign buyers that have options that may be closer to home (read: uranium deposits in the US). But if Australia bolstered demand for nuclear power, something only possible with the government playing a part in establishing nuclear facilities, this would be good for ASX stocks like Boss Energy (ASX:BOE).

But let’s turn away from what may happen with a change of government and onto what is actually in the MYEFO. One measure hidden there is that commercial television and radio broadcasters, including Nine Entertainment (ASX:NEC) and Southern Cross Media (ASX:SXL), will have the commercial broadcasting tax suspended for a year, starting on June 9 next year. Another is that gambling and tobacco activities will be ineligible for the R&D tax incentive. This will impact stocks like Aristocrat (ASX:ALL) and Jumbo (ASX:JIN).

Conclusion

Beyond any specific measures in the budget that may hurt or hinder particular industries, it is difficult to tell how individual companies could be impacted by the so-called budget blowout. But the key thing impacting the major market indices is interest rates…when will they begin and by how much? There is concern that spending will result in rate cuts being delayed, but only time will tell.

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