BofAML on why the Budget needs fixing

From Alex Joiner and Saul Eslake at BofAML:

One of the key economic challenges Australia faces both now and over the medium term is that of restoring the nation’s finances to a sustainable position. We emphasize that this is not because we think budget deficits, or public debt, are inherently bad. Indeed we have some sympathy with the view that governments should be willing to borrow, at what would be the lowest interest rates in generations, in order to fund the provision of critically-needed infrastructure.

The difficulty, of course, is entrusting governments actually to use such borrowings for the provision of additional infrastructure, rather than ongoing deficits, and to fund projects that are targeted towards meeting critical economic or social needs, rather than winning marginal seats.

Nor do we think that the budget deficit needs to be eliminated urgently, especially when to do so would detract from an economic growth rate that is already below trend.

Contrary to what the Coalition parties argued, both before and after the most recent national elections, Australia does not face either a ‘debt crisis’ or a ‘budget emergency’ – and in our view they knew it, otherwise they would surely have done something about it shortly after winning the 2013 elections (as their British counterparts did after winning the 2010 election), rather than waiting for eight months before doing anything other than taking decisions that actually added to the deficit rather than reducing it (such as, in particular, abolishing the carbon tax but keeping the ‘compensation’ for it, at an annual cost to the budget of around $4bn).

Rather, the principal fiscal challenge that Australia actually faces is that of a significant mis-match between what Australians expect governments to spend by way of services and benefits to them, especially as the population ages, and what Australians are willing to hand over to governments by way of taxation in order to pay for that spending.

Additionally, there is a need to ‘replenish’ Australia’s capacity to respond effectively to any future economic ‘shocks’, especially considering that the Reserve Bank of Australia probably won’t be able to cut interest rates by as much as it did during the global financial crisis, given that interest rates are much lower now than they were at the onset of the financial crisis.

All very good. My only issue is that I see that next crisis coming in the next few years so we do, in fact, have a kind of budget emergency. That is, if you don’t want to see the sovereign rating stripped with all of the flow effects that that entails.