TIM HEXT: Fiscal policy will stay expansionary under Labor. Here’s what that means

Monetary policy will have to work harder to keep inflation in check if the new Labor government is still putting extra dollars into pockets, writes Pendal’s TIM HEXT

THE federal election was an exciting moment for all Australians, but a week later our fascination with politics is probably again confined to those in Canberra.

This time last week I was an expert in the comings and goings of seats like Fowler and Gilmore. In a month I won’t be able to tell you where they are, let alone who the local member is.

One thing that’s clear, though, is fiscal policy will stay expansionary under Labor.

The new government’s additional spending adds $19 billion to the budget while its aspirational revenue plan only takes off $11.5 billion.

Budget numbers were supercharged during Covid, so $19 billion is barely noticed. But let’s stop and think about the impact.

Let’s remember that a public sector deficit is a private sector surplus – more money is entering the private sector than is taken out.

When the RBA tightens by 1%, the interest bill on the $3 trillion debt goes up by $30 billion. However, two thirds of debt is lent by Australians – so $18 billion is a transfer between borrowers and savers within Australia.

Only one third of the interest leaves the country and goes into the pockets of foreigners. So the Labor spending plans on a dollar-for-dollar basis roughly negate the 1% rate rise. I understand this is not a straight comparison since rate rises have second-round impacts to economic activity and wealth more so than fiscal policy.

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Also it does matter whether the money is entering or leaving pockets with a propensity to borrow or save.

But this does show that monetary policy will have to work harder to keep inflation in check if the government is still putting extra dollars into pockets.

If all goes well for Labor the global economy will open up quickly in the next few years, helping the supply side catch up to the strong demand side.

If not, they face a growing problem of entrenched inflation, spurred on by their fiscal policy pushing demand. Rates will then have to hit restrictive levels – which nearly always turns into recession, just in time for the 2025 election.

As bond managers we are constantly monitoring the interplay between demand and supply in the economy.

We will shortly publish an in-depth piece on the inflation outlook.  For now though, inflation is here to stay and long bond duration remains vulnerable.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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