19 December 2016
by Stephen Koukoulas
hen Joe Hockey, as treasurer, delivered the Coalition’s first budget in May 2014, he framed the government’s policy agenda around budget deficits of $10.6bn in 2016-17 and just $2.8bn in 2017-18. The budget was to swing into surplus in 2018-19 and every year beyond that.
With two-and-a-half years of Liberal–National party economic policy settings since that Hockey budget, today’s treasurer, Scott Morrison, has outlined the results of that plan, plus the impact of new policies and economic changes in today’s midyear economic and fiscal outlook (Myefo). Morrison has confirmed that the current projections are for budget deficits of $36.5bn in 2016-17 and $28.7bn in 2017-18, meaning the 2017-18 deficit alone is some six times larger than projected by Hockey.
The Hockey framework meant that Australia’s sovereign triple-A credit rating was assured with all three major ratings agencies noting the fiscal trajectory and underpinnings of solid economic growth as reasons for this favourable assessment. Helping also was the projection that net government debt would peak at low level of 14.6% of GDP under the Hockey 2014 budget scenario.
Alas, the strategy outlined in 2014 is in tatters.
In addition to blowing the budget deficits out by tens of billions of dollars a year, Morrison has pushed out the return to surplus to 2020-21, some two years later than Hockey and is now forecasting net government debt to reach a 60-year high of 19% of GDP. Recall that 1% of GDP on 2020 dollar terms is about $20bn.
The question now is not whether the ratings agencies will downgrade Australia but whether there will be numerous downgrades over the next few years.
The curious thing about the debt and deficit widening of the last few years is that it has been driven by a rise in government spending together with a shortfall in revenue.
Government spending as a share of GDP under the Morrison Myefo forecasts is projected to be 25.2% of GDP in both 2016-17 and 2017-18, respectively, compared with the Hockey 2014 estimates of 24.7% and 24.8%, respectively. Accordingly, government spending is an average 0.5% of GDP higher each year than projected by Hockey.
At the time of the 2014 budget, government revenue as a proportion of GDP was forecast to be 24.4% in 2016-17 and 24.9% in 2017-18. The Morrison Myefo forecasts are for revenue to be 23.3% and 23.8%, respectively, a shortfall of an average 1.1% of GDP in each year.
Morrison has failed to address either spending, which is significantly higher than in the 2014 budget, nor revenue, which is clearly lower.
There is one other big picture issue on the economic management credentials of the Coalition government.
One critical lesson from the 2008 to 2011 financial crisis is that fiscal policy can be used to manage the economic cycle – running budget deficits to support economic growth has virtues, as does tightening fiscal policy to lower the deficit, move to surplus and preserve the credit rating. It is a simple trade-off.
The Coalition has neither supported growth nor repaired the budget. When Labor “blew the budget deficit” to above 4% of GDP during the financial crisis, they could gain comfort in the knowledge that their policy choices meant Australia avoided recession and the unemployment rate peaked at 5.9%. There were significant benefits from that particular budget deficit blowout. It should be noted that it was after these budget measures were taken that, in 2011, Australia achieved the coveted triple-A rating, with a stable outlook, from all three major ratings agencies.
Now, as 2016 draws to a close, GDP growth is stalling, the unemployment rate is stuck nearer 6% than 5%, underemployment is near record highs and wages growth has fallen to a record low.
These are the core reasons for the likely credit rating downgrade. Had fiscal policy been used to support growth, the ratings agencies would have seen the pro-growth strategy. Had the budget been repaired, albeit it at the cost of growth, the rating agencies would have rewarded that strategy.
Blowing out the budget with falling GDP is a mark of policy ineptitude.
