Chart of the week: Is the Federal Reserve "crazy" or just President Trump’s budget plans?

19 October 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

                       Budget balance as percentage of Nominal GDP

  

Source: Final Budget Outcome 2017-18, ‘Appendix B: Historical Australian Government data’, www.budget.gov.au/2017-18/content/fbo/html/, accessed on 18 October 2018.

President Trump made extraordinary remarks over the past week suggesting that the US central bank “has gone crazy” by raising US interest rates. However the old adage applies here ‘when you point the finger of blame, there are always three fingers of your hand pointing back at you’.

The Fed is raising interest rates because the US economy is performing strongly and inflation risks are rising. Adding further fuel to the US economic furnace is President Trump’s budget stimulus. Given large corporate and personal tax cuts were implemented this year, the US budget deficit is set to sharply deteriorate. The US Federal budget’s annual deficit was US$779 billion in the year to September 2018. This equates to approximately -3.7% of US Nominal GDP (red line). The Congressional Budget Office is projecting the US budget deficit will significantly increase towards -4.9% GDP in 2021.

By contrast, Australia’s Federal budget is grinding towards a surplus. In the last financial year 2017/18, Australia’s budget deficit narrowed to A$10.1 billion which equates to approximately 0.6% of GDP (blue line). Providing Australia’s economy performs solidly and the Federal Government maintains some fiscal discipline over the coming year, there is even the possibility that an Australia budget surplus could appear only 12 years after the last one, way back in 2008.

Source : Nab assetmanagement October 2018 

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