Govt decisions during recession are ‘good news’ for markets

Decisions made by the Federal Government may prevent repeat problems coming out of prior recessions which is good news for markets, according to Yarra Capital Management research. 

Tim Toohey, Yarra Capital Management head of macro and strategy, said in previous recessions the Government would try to tax and spend less too soon before the economy had fully recovered. 

“We’ve now got a strong endorsement from the Treasurer that’s not going to happen,” Toohey said. 

“Their intent to put out a restrictive fiscal stance is just not there and certainly won’t be there this side of an election. 

“That’s good news for markets and good news for growth as the Government is not going to get in the way and they will support that growth. 

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“In the context of the central bank, whatever its going to do in terms of tightening, it certainly won’t be by the cash rate for another three years, so it’s a very supportive monetary and fiscal backdrop.” 

Toohey said he expected the May Budget, due next week, would be used to evidence that vastly better economic outcomes had been achieved, setting up strategic spending and tax changes for a May 2022 election. 

“We expect there to be a pretty dramatic improvement in the budget bottom line, in the order of about $50 billion, probably higher than that,” Toohey said. 

“And importantly, it’s going to be a Budget where the Government points to the score board and says what a good job was done in terms of managing the economy and look how strong the growth data is and look how strong the revenue upgrades are. 

“Then they will use some of that revenue buffer later on in the year with the outlook of an election in 2022.”