The Usual Charade Regarding Surplus

MELBOURNE AUSTRALIA 21 December 2006 – It’s the time of year for the oldest trick in the book to be rolled out again. And yesterday it was. The first ominous signs of its impending arrival was the headline in yesterday’s Australian Financial Review, “Surplus forecast set to shrink.” We all know what that REALLY means. It means that the surplus will be even bigger than the original forecast.

But as per usual the charade must be played out. We are told by the Treasurer, Peter Costello that, “revenues are moderating and expenditures, in some areas are rising.”

Then you get the likes of HSBC chief economist John Edwards forecasting the surplus to fall to $10.5 billion. And Grange Securities director of research Stephen Roberts predicting that it would fall to $8.5 billion.

At least Commonwealth Bank’s (ASX: CBA) chief economist Michael Blythe was smart enough to see through the bluff, he predicted the surplus could be as high as $12.5 billion. He told the AFR, “The expectation underlying budget figuring for some time now has been that the terms of trade is set to fall. The continued uptrend in commodity prices, however, is a significant contributor to government revenues surprising on the high side.”

It really shouldn’t have come as a surprise to anyone that the actual budget surplus was now forecast at $11.8 billion, compared to the prior estimate of $10.8 billion. Can we expect any of it to be given back as tax cuts? Well, there will surely be a tax cutting spree set in motion at the next budget, although we can only expect it to be a token gesture given that ANY government would much rather hold on to tax dollars claiming that it is there for a rainy day.

Despite this, and what one would think is a lack of credibility on forecasting, Treasure Costello also let everyone know that he believes the following years budget surplus for 2007-2008 will… fall to a measly $9.7 billion down from the previous estimate of $10.6 billion. Any takers for betting that the surplus next year will rise ‘unexpectedly’?

In typical fashion, shadow Treasurer Wayne Swan said the increased surplus was ‘good’. Is there anyone prepared to say ‘give us our money back’? Not likely, not when political parties and interest groups of all persuasions are busy with their calculators working out how to spend it.

But they aren’t the only ones out their hammering feverishly on their calculators, we note the headline from Reuters this morning, “Australia’s Macquarie may bid for O2 Airwave.” As weary readers are probably aware, we have held a healthy, or perhaps unhealthy, skepticism of the Macquarie Bank infrastructure funds for some time. Reason? The only ones that appear to benefit are the shareholders/owners of the companies that the fund buys, and Macquarie, thanks to the huge fees that it rips out of the funds.

In this case, the Macquarie Communications Infrastructure Group (ASX: MIG), the one that amazed the investment world when it bought television broadcast masts and other such obscure communications businesses. Now, according to the report, it is prepared to “up to A$5 billion for British emergency broadcast services provider, O2 Airwave.”

The report also said that MCIG “led a consortium that bought telecommunications infrastructure group Arqiva in 2004, but recently missed out on a controlling stake in French satellite operator Eutelsat.”

We don’t know much about the O2 Airwave business, but as per usual we question what the growth prospects are. And given that it is an “emergency broadcast services provider” we also question its ability to be able to raise prices and the level of interference it could be subject to from government. That doesn’t seem to bother Macquarie, because they are prepared to pay fifty times earnings for it. Wow! At least THEY must think it has huge growth potential. Given that one of the firms they missed out on – Eutelsat – is priced on an earnings ratio of 14 times which is at a slight discount to the sector average of 18 times.

But as we know, know of that matters when you can siphon off a lovely big fee. And as a bonus, it isn’t Macquarie’s money anyway. Everyone’s a winner – except the investors in the fund.

Kris Sayce

Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005.
He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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Re surplus :
Any “surplus” has already been spent on an accrual basis. That’s partly why the Future Fund was created, but it is still in deficit in accrual terms.

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