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Deficit years are clear winners for shareholders

Politicians and economists may argue the benefits of deficits and surpluses, but for the investors there is only one thing that matters: returns.

Philo Capital joint chief executive Ashley Owen argues deficit years generate higher returns for shareholders than surplus years

For the period after the second world war, the median total return for Australian shares in years of surplus amounts to just 2.4 per cent, according to research by Philo Capital. For years in deficit, that number jumps to 10.8 per cent.

"By and large, a deficit, or an increase in the deficit puts money back into the system, ultimately which pops up in share prices, more often than not," Mr Owen said.

While debt may be getting a bit of a bad rap in Canberra, the benefits for investors seem clear.

"Deficits come about by governments spending more money, and/or taxing less, and much of the additional cash ends up in company coffers, either directly via contracting directly to government, or indirectly via household spending," Mr Owen said.


"Deficits tend to be high in mid-late recessions, when tax revenues are down and welfare spending is up, and this is when shares generally do best, rebounding out of the middle of recessions. This was the case in 1954, 1972, 1983, 1992 and 2010."

Joe Hockey's first budget, characterised by claims that all Australians need to do the heavy lifting to bring the country's finances under control, aims to bring the budget back to surplus within 10 years by heavily cutting government spending.

To realise a surplus, or contraction in deficit, tax hikes or spending cuts are needed to achieve the reduction, meaning there is less economic activity and therefore less money in the system.

Australia's growing population and the demographic of that population create conditions where it would be favourable to run a healthy deficit, Mr Owen said.

"The vast majority of immigrants in Australia are 30 to 40 year old working people who have come ready, and not only that they come with a family ready to work in 5 to 10 years," Mr Owen said.

However, a declining population with a declining working force, like in some parts of northern Europe and Japan are a situation where a surplus because the amount of people contributing to government coffers is falling.

"In Australia's case, there is a strong case for running a good solid deficit in order to create productive capacity in the future, given that the populations are growing and the demographics are very favourable," Mr Owen said.