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Why the ASX is getting an economic boost today

Tristan Harrison
Budget 2018

The ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) had swung into the green this afternoon after being down in morning trade. However, it has since dipped into negative territory again.

In what may be a surprise to some people, the government revealed the smallest budget deficit in 10 years. A deficit is still a deficit, but the improvement is a good sign.

Australia was in the red by $10.1 billion for FY18, an improvement of $19.3 billion compared to the original estimates.

If Commonwealth Bank of Australia (ASX: CBA) delivered a loss of $10.1 billion it would be panic, but luckily the deficit only represents 0.6% of Australia’s gross domestic product (GDP).

Australia has been growing at an impressive rate – 3.4% GDP growth in the year to June 2018 was recently revealed. However, some cynical analysts pointed out that this growth is being largely funded by households eating into their savings.

Treasurer Josh Frydenberg said that stronger growth and a strong jobs market was the cause for the budget going beyond previous expectations.

A return to a budget surplus would be welcome news. Every year of a deficit adds to the growing pile of debt that will soon be costing more and more in higher interest rates.

Rising interest rates will affect the Government, businesses and individuals alike. That’s probably why Westpac Banking Corp (ASX: WBC) is ending its relationship with risky borrowers, according to the AFR.

Foolish takeaway

It’s pleasing that the Government budget is getting into better shape because times won’t always be as good as they are now. The politicians can only hope that households also start improving their balance sheets because household debt to income is at all-time highs right now.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.