The Federal Budget handed down last week contained some very buoyant predictions of Economic growth for Australia. As of March 2010, GDP is running at an annualized $1,269 Billion. The Budget predicted that by 2014 the GDP will reach $1,655 Billion. How taxation is budgeted for in Australia is that around 25% of GDP is expected as total Federal receipts. Therefore taxation is expected to bring in $407 Billion in 2014. This obviously is a fairly hefty increase from the current $298 Billion received per year, and indicates that economic growth is required to bring in an additional $109 Billion per annum to bring the budget back into surplus.

From these projections you can draw some conclusions from what is expected from the Banks in terms of asset growth. As demonstrated by the chart, and discussed previously, the historical growth of Bank Assets relative to GDP requires Bank Assets to grow at a faster rate than GDP. So, if GDP is projected to grow at 30%, then it is not unreasonable to expect Banks' balance sheets to grow at least by 30%, but probably higher.

A side point is too acknowledge the growth and continued dominance of the 4 major Banks in Australia, as their size is outstripping the size of our economy. Overseas countries are currently tackling the concept of "Too big to fail". Also, issues such as splitting the businesses between commercial banking and investment banking is being canvassed. Why should a taxpayer sponsored Government Guarantee apply to Banks undertaking investments at the higher end of the risk spectrum? And if Resource Companies are required to pay a "super" tax for exploiting Australia's resources, surely a case can be made that the Oligopoly of the banks could not make as much profit (or have survived the GFC) without the guarantee of taxpayers.

The bets are clear. The Government is betting on 4 years of average growth of 6.7% per year (30% over 4 years). This means that the banks need to grow at least, if not more than that. This obviously has implications for the Banks' share prices. The other side of the bet, of course, is that Europe will be required to curb their spending to make an attempt to balance their budgets. These spending cuts will by necessity reduce demand. Additionally, the health and growth of the US, UK, and Japan is similarly in question, completely contrasting the Australian forecasts.



Digging into the current trends of Bank Assets for the majors, the above chart really highlights the imbalances in our economy. Commercial Lending has been falling consistently since 2008, and not by accident. It is well acknowledged that Bank lending has focused on the household sector, and that terms for commercial loans has tightened significantly. Commercial lending reflects the prospects of overseas economies. So where will the predicted growth in Bank lending and GDP go? On these factors, it appears that we will be reliant on further inflation of home prices, with the commensurate spending it generates.

There is also the spectre of Sovereign risk generated by the politically mishandled Resources tax. Our best case scenario is an economy put further into imbalance by the shift into home lending, rather than commercial lending. The worst case scenario is a growing budget deficit, and the fiscal restraints that will put on us in the future.