Markets go the wrong way for the fiscal freaks
The news that weaker than expected growth in nominal GDP will see the government fall around $12 billion short in its revenue collection for 2012-13 has been met with all of the bluster, outrage and claims of incompetence from the usual sources.
For these fiscal fiends and Tea Party economists, this on-going ignorance of matters relating to the budget is no surprise, but it again constrains sensible debate over taxing, spending, surpluses, deficits and government debt.
Fortunately, there is a better and almost pure assessment of the new budget information and that is from financial markets.
If the budget news truly was a sign of poor economic management, unsustainable government finances or it was any way a concern, you can bet your life that the Australian dollar would be sold off hard and bond yields – the price of government debt – would jump.
At around 9.30am, Eastern time, with the marketing having had plenty of time to digest the news, guess what has happened in the markets?
Government bond yields have fallen – about 3 to 5 basis points to be closer to fresh record lows, while the Australia dollar is up to be trading around 1.0285.
No sign of a capital flight from the bond market or the Australian dollar – in fact, the opposite is happening.
I think this sums up the concern most sensible and sane people have when it comes to judging the true consequences of the government having a revenue shortfall in the budget and a deficit that is still set to be 1 per cent of GDP or less.