From the most often objective Bill Evans:
Net public debt increases to 18.5% of GDP in 2017/18, revised up from a peak of 18.0% at Budget time. Gross bond supply reaches $552bn (28.9% of GDP) by June 2018, revised up from $521bn.
Three key aspects of these estimates represent the greatest vulnerability, in our view:First: that the iron ore price stabilises at $US39 (FOB). Currently, the spot iron ore price is $US39, equivalent to $US35 (FOB). If the forecast approach is to “flat line” a price then it may have been more appropriate to choose a price closer to current spot and nearer to the current production costs of Australia’s major producers. The Government’s terms of trade forecast for 2015/16 is –10.5% and for 2016/17 is –2.25%. Our own terms of trade forecasts for these years are –12% and –5%.
Second: over the five years from 2017/18 to 2022/23 the economy is expected to consistently grow by 3.0% p.a., some 0.25% above potential growth (2.75%). This is in order to eventually fully close the output gap. While this approach might have some elegant aspects the case for five consecutive years of above potential growth is not convincing.
Third: Total receipts as a proportion of GDP increase to 24.8% in 2018/19 (from 23.5% in 2014/15). That proportion is only slightly lower than the “average” for 2003/04 to 2007/08, a period when the national finances were being boosted by the mining boom (resource companies) and the credit boom (banks). In addition, total payments fall as a proportion of GDP from 25.9% in 2015/16 to 25.3% in 2018/19. This combination of receipts up and payments down has proven to be a very tough act for any government to achieve.
From the often bullish Paul Bloxham:
…the trajectory is worrisome. Australia has seen one of the more rapid increases in its government debt when compared with the developed economies. Countries that have seen bigger increases in government debt have had much worse growth performances in recent years. Of the nations that have a triple-A sovereign rating, Australia has had the largest increase in its net government debt since 2008.
Putting Australia’s public finances on a sustainable path is a key challenge that the government faces. Ostensibly, this can be done in two ways: increase tax revenue or decrease government spending. As today’s numbers showed, tax revenue is on a lower trajectory than the May budget had projected. This reflects that real GDP growth is expected to be weaker than previously thought and that commodity prices have fallen and inflation has been lower, which are both weighing on nominal GDP. Part of the downward revision to the growth forecasts reflects an estimated reduction in Australia’s potential growth rate from 3.0% to 2.75% by the Treasury, reported in today’s release.
While revenue forecasts have been downgraded, expenditure projections are similar to those in the May budget. There is a small positive impact on payments over the next two years as a result of policy decisions, but this is offset by the impact of changes to ‘parameters and other variations’ such as the assumption of a lower rate of population growth.
Today’s update shows the magnitude of the task the government faces, but included no major new policy solutions. These will be in focus in the lead up to the May 2016 budget and late-2016 Federal election. We expect the government to be focused on tax reform. A key part of this is expected to include a possible increase in the goods and services tax and perhaps a broadening of its tax base. Tax reform could help to deliver more growth as the tax system’s reliance on personal and corporate taxes has made it increasingly inefficient.
I could go on. Blind Freddy can see that the Budget is a work of fiction on a par with The Lord of the Rings. My own objection is to the iron ore price of $45 projected. Given my assessment is that the market is close to capitulation the likelihood is Morrison will have to turn around and downgrade everything again in May. That will add declines in his own credibility to the sticker shock blow to confidence that these baby step downgrades are supposed to prevent.
Global markets are giving us a lot of rope and successive governments seem happy to hang themselves (and us) with it.
