You’ve been warned: The budget is credit rating crunch time for the government

You’ve been warned: The budget is credit rating crunch time for the government

20 April 2016

By Stephen Koukoulas

Treasurer Scott Morrison is framing the May 3 budget with the Coalition having failed to deliver on the budget deficit, failed on government debt, failed on business investment and failed on employment.

This failure of economic policy has seen Moody’s, the credit rating agency, warn that Australia’s triple-A rating is under threat if nothing is done to seriously address the budget deficit and rising government debt. This follows warnings from economists at JP Morgan, NAB and the Commonwealth Bank that the cocktail of government debt, net foreign debt and household debt could all spark a credit rating downgrade.

Morrison and his Prime Minister, Malcolm Turnbull, have been trotting out the line that the budget will have as its central objective “investment and jobs”. This slogan is no doubt working well in focus groups as it is a simple truism of any and every treasurer and finance minister around the world. Morrison also wants to outline a “credible” path of returning the budget to surplus, which is about as wishy-washy as one can get, a point implied in the Moody’s credit warning.

Who doesn’t want investment and jobs? Who doesn’t think that a sustainable path to surplus is a good idea?

The Government’s track record on the budget, investment and employment since its resounding election win in September 2013 is poor. To be frank, it’s a fail. It is made worse by the fact the Coalition fought the 2013 election campaign on returning to budget surplus, paying off government debt, boosting investment and jobs. Do you recall the pledge to create one million jobs in five years and free up the business sector by getting rid of red tape, the carbon and mining taxes and undertaking an infrastructure boom?

When Morrison gets to his feet to deliver the budget, have in mind the following track record of the Coalition in government.

At the latest count, the level of net government debt is $288 billion, a rise of $113 billion from the level at September 2013. Gross government debt has ballooned to $424 billion from $273 billion at the time of the election. There is nothing on Coalition’s policy agenda to stem this rise.

Indeed, it has a policy record of implementing policies that make it worse, with foregone revenue from the carbon tax and an unnecessary $8.8 billion handout to the Reserve Bank two big ticket examples.

It is little wonder the credit rating agencies are getting a little antsy, particularly when the budget will likely see another series of wide budget deficits despite rising government revenue.

On Morrison’s own figuring in MYEFO in December last year, net government debt is on track to reach $347 billion by 2019 with gross debt to rise above $500 billion within two years.

On the issue of job creation, the Coalition came to power promising to increase employment by one million people in five years. Half way through that five year period and job creation is sitting at 441,900, almost 60,000 short of the run rate required to hit the one million target. While superficially appealing, the rate of growth in employment is not keeping up with population growth, which is why the unemployment rate is higher, albeit marginally, than when the Coalition took office.

Perhaps most worryingly, private sector business investment has been in free-fall since the election. According to the ABS private capital expenditure survey, business investment has crashed 23 per cent since the election to match the sorts of falls usually reserved for recessions. Adding to the failure is the fact that, despite promises to ramp up infrastructure spending, public sector investment has slumped 11 per cent to be at close to a record low share of GDP.

Making matters all the more problematic is the fact that the Australian stock market is lower today that it was at the time of the election.

It is not a record to be proud of and thankfully the record low interest rates set by the RBA and the sharp depreciation of the Australian dollar have come to the rescue of the overall economy.

Treasurer Morrison cannot rely on ever falling interest rates and an ever depreciating Australian dollar to support the economy. A mix of revenue measures, carefully targeted spending, and efforts to tackle inequality in healthcare and education are vital steps to address the current economic hot-potch.

The budget on May 3 is a wonderful opportunity to deal with the obvious failures of the Government so far in this term and all eyes, especially those of the voters and credit rating agencies, will be watching closely and ready to pass judgment. Failure will be measured if the rating agencies put Australia on negative credit watch. Which, if the recent news is a precursor, is odds on.

References

You've been warned: The budget is credit rating crunch time for the government, The Drum, 20 April 2016

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