I hate to spoil the Christmas fun, but it needs to be said in the wake of the Moody’s report released yesterday that reaffirm Australia’s AAA rating:
Australia’s Aaa ratings are based on the country’s very high economic resiliency, very high government financial strength, and very low susceptibility to event risk. Economic resiliency is demonstrated by the country’s very high per capita income, large size, and economic diversity. As one of the world’s most advanced economies, the country has not only a significant natural resource sector–including minerals, hydrocarbons, and agriculture–but also well developed manufacturing and service sectors. It also demonstrates strong governance indicators. In particular, the framework for fiscal policy is transparent and has, until now, consistently kept government debt at low levels.
The government’s debt rating of Aaa takes into account the aim of maintaining a balanced budget, on average, over the business cycle. It is supported by the very low level of public debt and the country’s strong financial system. In comparison to most other Aaa-rated countries, Australia’s government financial strength is very high, with very low gross debt that is easily affordable and provides a high degree of fiscal flexibility.
All very laudable and comparatively excellent positions for the nation’s economy to be in, particularly “government financial strength”, where the total stock of debt is at $A223 billion, or about 15% of GDP. This is in distinct comparison to every other developed economy (where the average is closer to 100% of annual economic income) and is regularly touted as a strength.
The above has been noted, cheered and lauded by all elements of the media and the politico/housing complex. And up to this point in the report, they are correct.
The battle to return the budget to surplus and limit the size of government debt has been leveraged (sic) on both sides of politics, but this morning, Opposition Treasurer Joe Hockey went even further, if somewhat hysterically, warning about the level of debt:
THE Gillard government is maxing out Australia’s credit card much more quickly than it would have us believe and it’s what it is not telling us that makes the situation even more serious.
This has resulted in the Opposition objecting to raising the debt ceiling, currently at $250 billion, some $27 billion above current levels, a gap larger than the current budget deficit of $37.1 billion, although a tight $1.5 billion surplus is planned for 2012-13, as announced in the MYEFO recently.
The Coalition is putting pressure on the government to ensure the surplus requirement is met, including canceling the mining and carbon taxes, but have not ruled out blocking the raising of the ceiling to force these political measures.
Hockey is also putting additional pressure on the government paying down the stock of existing debt (which will grow to a “massive” $A275 billion by 2015):
Without further detail, the government’s projection to reduce net debt to zero by 2020-21 is hardly believable, coming from a Treasurer who this year will chalk up his fourth huge deficit out of four budgets. It would require six consecutive annual reductions in net debt of $22bn.
That is six consecutive surpluses larger in dollar terms than has been achieved previously (the largest underlying surplus was the $19.7bn achieved by the Coalition in 2007-08) or very solid growth in financial assets, which seems problematic given the likely continued financial and market volatility across the medium term.
Beyond the problem of an absence of a deep and liquid government debt market, thus assisting corporate Australia and superannuation savers in having a non-speculative market in which to place and match investment monies, and the lack of mathematical rigour applied to his analysis, the Opposition Treasurer is broadly correct.
Let’s get back to the final half of the Moody’s Report that is the most important:
The stable ratings outlook is premised on the expectations that the government will maintain its low debt levels and macroeconomic conditions will continue to support fiscal consolidation.
Any trend or event that caused a long-term shift in budget balances to significant deficits and an increasing public debt burden might put downward pressure on the rating.
In other words – austerity. The rating’s agencies and both sides of politics have reinforced, paradoxically, the underlying weakness and imbalances of the Australian economy.
A concentration of risk through:
- the ever increasing “wealth” of the housing market which requires full support of the banking sector through continued access to cheap funding (a sizeable amount from overseas wholesale debt markets) and continually lower interest rates for mortgagors, and
- the reliance on a record terms of trade (based on record high commodity prices) to boost national income.
To lose the AAA rating exposes the government and financial system to higher costs of funding any deficit, which will be required during any future financial crisis, or increasing costs for the banking system, thus restricting credit in the broader economy.
Either the government returns to surplus and maintains the fiscal austerity, hence keeping the net level of public debt low, or the rating’s agencies will reassess the “stable” outlook with all the implications that has for our banking sector and of course, the housing market, unemployment and the broader economy.
The economy could grow its way out this dilemma (through higher tax revenue), but as I showed in my post yesterday, even with enormous stimuli (including from China) and the record terms of trade, since 2008 the rate of growth is well below the long term trend, as the one speed economy continues to groan under the weight of record high private debt over 150% of GDP.