Wayne Swan and the Labor Government handed down their 5th budget last month and presto just like magic projected a surplus of $1.5 billion for 2012-2013. This was achieved by dramatic cuts across almost every government department and portfolio. This will be the first budget surplus since Labor came to power in 2007. Personally, I do not believe that this “surplus” will ever occur. Despite cutting costs the underlying revenue numbers are based on the most optimistic revenue forecasts in 50 years. As well creative accounting has brought some expenses forward into the current financial year with the effect of increasing this year’s deficit whilst some expenditure are deferred to the 2013-14 in order to create an illusion of a small surplus.

Families, those on low incomes and the elderly appear to be the winners in this budget with more cash payments and tax breaks. This is supposed to be funded by the mining tax and is pitched as a way of sharing the benefits of the resources boom. High income earners are the most adversely affected by this budget which was no doubt influenced by the Greens.

So if you have kids, are low income earners or is an older Australian there is some money available to you in the hopes of buying your vote. Whilst I am in favour of social programs to look after those who can’t look after themselves this obvious pandering to the poor and unemployed fosters a culture of entitlement and reliance on government handouts as opposed to developing a self-sustaining work ethic. This budget seems to forget that the engine room of the Australian economy is small business and if these businesses aren’t given the opportunity and environment to grow and prosper then less people will be employed. I will leave it up to you to pass your own judgement but consider this fact. Last year’s budget projected a deficit of $22 billion and the actual deficit was almost double that. This budget surplus was more about politics and is perhaps best described as the “surplus we had to have”.

Market volatility has returned as concerns about Europe have re-emerged. Elections in France indicating a shift towards socialism and no clear Greek results to their election have reignited fears about European debt. Fears about Spain have increased as Spanish bonds yields have topped 6%. Added to this is the mixed economic data coming out of the US.

In my opinion I think that the markets are still consolidating and building a solid base in the 4000-5000 range before they can move higher. Historically this consolidation period following a market crash ranges between 20-33 months. The current period of consolidation in the Australia share market is now 31 months. The current dividend yields available are higher than the new RBA cash rate of 3.75%. When you add in franking credits you are receiving good tax effective income while holding stocks. I would continue to accumulate shares in quality companies on any price dips and take comfort in the fact that there is a huge amount of cash on the sidelines to support the markets at or near current levels and once this cash is redeployed in shares it will provide significant upward price pressure on shares. Whilst it would be nice to pick the absolute bottom on prices it is impossible. It is better to be invested prior to the stock market rising than missing a significant part of any upward move. Shares in quality companies are on sale relative to their long term valuations and should remain a core part of your investment strategy and asset allocation.