David Uren has some reassuring words for us from credit rating agencies today:
None of the three major agencies believes Australia’s AAA credit rating is in jeopardy from the budget debate, with the economic outlook seen as the greater risk.
Standard & Poor’s associate director Craig Michaels said…“We would expect to see some compromises made by the various parties so that in broad terms, the government’s fiscal targets as outlined in the budget are achieved,” he said.
…Moody’s senior vice-president Steven Hess said a year or two’s delay in returning the budget to surplus would not matter to global debt markets.
…Fitch Ratings director of Asia-Pacific sovereign ratings Andrew Colquhoun said of the 13 AAA rated countries in the world, only four were projected to be running budget surpluses by 2016.
There are a few little ironies here. The Budget is only so tight because the rating agencies insist on a medium term path to surplus to protect the budget’s off balance sheet liabilities, the private debt guarantees most obviously expressed though the banks’ two-notch ratings uplift. That is not separate to the economic outlook. It’s pivotal to it.
Consider. Were we a more competitive economy, tradable and import-competing industrial growth would be a much larger proportion of the economy and more deeply embedded in domestic activity. But because we only export dirt, and that is capital intensive and employs very few people, the manner in which that income is turned into domestic activity is by leveraging it up offshore, either via the banks and house prices or via the budget.
So, when you simultaneously require a tight budget and contained house price growth, as the agencies are doing now, you condemn Australia to low economic growth, especially in its domestic expenditures, which, by definition, prevents the return to surplus you need to see, unless the resources sector keeps booming.
It may be reassuring that the Canberra circus can’t kill the country in the near term. But the model of growth is still out of puff and assuredly will slowly kill the economy in the long term, most obviously at the hand of the rating agencies reassuring us today.
And it is a deceptive process that can appear to be happening slowly but then reaches a tipping point.. One minute you’re the toast of CRA’s and global markets, the next the only capital that wants to know you is the marauding global hedge funds shorting your debt.
The way out is not, as the CRA’s are suggesting today, more cyclical pump priming. That’s only going to make the structural imbalance at the root of the vulnerability worse.
The way out is to improve your competitiveness via structural change, including budget reform, which Abbott’s Budget barely touched, and what was done is quickly being undone.
Be reassured if you wish!
