Australian budget surplus plans shelved as expected

Australian Treasurer and acting Prime Minister Wayne Swan today confirmed the 2012/13 budget position is unlikely to come in at its originally planned $1.5bn surplus. We first raised the fiscal situation facing Swan in September in a note titled “Australian fiscal tightening will pave way for RBA cuts” In our note we said “What does the Treasurer do if the income side of the equation is not performing and the net outcome needs to be maintained, mainly for political reasons? Cut the expenditure” and ”The cuts need to be large enough to balance the books”

It seems like Swan and the Labor Party know the consequences of large cuts in an election year aren’t worth risking – hence the dumping of the 2012/13 surplus. The current government has figured the risk of being branded a promise breaker outweighs the economic consequences of deep cuts, and a pre-Christmas dumping of the surplus will be quickly forgotten when parliament resumes in the new year. The net impact on economics is minimal – the surplus was always a token measure which would never be enough to change the overall debt position of Australia. It’s good news for the jobs market, with recent government cuts already starting to impact the corporate world.

Bottom line: The direction of the copper price is a lot more important to Australia’s fortunes over the next few weeks. Copper is an important lead indicator for all other industrial commodities including the bulks which Australia relies on as key exports and tax generators. Copper needs to find support at its 200 day moving average of US$3.5785/lb in order to set up another test of the US$3.60-65/lb range. Any breach below the 200 day moving average could see it fall all the way back to US$3.30/lb where it has developed strong support. The ASX200 index and copper price have a fairly strong correlation as illustrated by the chart below (Source: Reuters)