Goldman warns on AAA rating, early election

From Tim Toohey at Goldman:

Our weaker economic growth forecasts, with a weaker expected path for domestic demand and population growth, suggests the Treasury’s figures are still too optimistic. On balance, we expected the Treasury to reveal a deficit forecast closer to $40bn in 2015-16 and a $20bn deterioration over the 4 year projection period. In the end, although we were approximately $2.5bn too high in terms of the 2015-16 deficit, over the 4 years the underlying deficit deteriorated by $26bn. It is notable that deterioration could have been worse as the MYEFO included the booking of a $4.2bn provision for lost tariff revenue for the signing of the China-Australia Free Trade Agreement.

The MYEFO goes to great lengths to stress that the deterioration is due primarily to changing economic assumptions, however, it is still questionable whether Treasury have embraced a sufficiently conservative assessment of nearer and future economic growth. Importantly, the MYEFO does make some steps to addressing growth initiatives via its innovation policy, however, the MYEFO also makes it very clear that the accumulation of government securities on issue is occurring at a rapid pace. The face value of CGS on issue (on a within-year peak basis) is projected by Treasury to rise to 33.3% of GDP by 2018-19 compared with the estimate in the May Budget of 27.8%. Should growth fall short of Treasury’s estimates, commodity prices prove weaker, the Senate remains unwilling to pass saving measures (estimated to have cost $4.4bn over the 4 year projection period) or global interest rates move higher then even greater concerns will be raised over the pace of accumulation of federal government gross debt as a share of GDP.