Moody’s warns AAA rating needs tax hikes

From Moody’s:

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Australia’s Focus on Spending Cuts Makes Balancing Budget Difficult

Last Friday, Australia (Aaa stable) Treasurer Scott Morrison announced that the budget to be released on 3 May would focus on curbing spending to lower the government’s fiscal deficit. However, given previous difficulties in reducing welfare benefits, actual spending cuts may be modest. Moreover, Mr. Morrison’s announcement excluded measures to raise revenues. Without such measures, limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by the fiscal year ending June 2021 and government debt will likely continue to climb, a credit negative for Australia.

Notwithstanding Australia’s favourable fiscal metrics relative to Aaa-rated peers, Australia has had a prolonged and marked increase in government debt over the past decade (see exhibit). During a period of relatively strong GDP growth, Australia’s government debt has risen to 35.1% of GDP in fiscal 2015 from 11.6% 10 years earlier. We expect government debt to increase further to around 38% of GDP in fiscal 2018.

The 3 May budget will provide more detail on measures aimed at limiting expenditure growth. However, the government’s pledge to curb spending will be tested by significant spending commitments on welfare, education and health. Despite a consensus on fiscal consolidation through successive administrations, the government has been unable to reduce expenditures to significantly below 36.5% of GDP since 2009.

Moreover, fading prospects for tax reform present challenges to boosting government revenues at a time when lower commodity prices are weighing on receipts from corporate profits and income taxes. Changes to superannuation tax concessions are still on the agenda and will raise government revenues, but they will be insufficient in achieving a balanced budget within five years.

Meanwhile, an increase in the goods and services tax to 15% from 10% that was envisaged earlier and would have raised an estimated AUD35 billion, according to the treasury, has been shelved. Other tax changes that would result in savings to the government are proving difficult to adopt ahead of an election later this year. Measures to streamline tax returns, which would reduce tax administration costs to the government, are now also unlikely to be part of the budget.

Plans to alter negative gearing policies and capital gains taxes, which support residential investment and house prices, but weigh on government finances, are proving divisive. The opposition Labor party argues that limiting negative gearing to purchases of new homes and reducing the capital gains tax discount on asset sales to 25% from 50% would improve the budget position by AUD32.1 billion over the 10-year period starting July 2017. The governing coalition has rejected a narrowing of the scope of negative gearing policies on the grounds that it would have a significant negative effect on the housing market.

The good ship SS Budget hit an iceberg in 2008 and the gunwales are now slipping below the waterline.

Comments

      • AAA is another good reason to rush to an election. Losing AAA or even talk of it entering the mainstream discourse would/will deal a crippling blow to the Coalition’s main drawcard (economic management).

  1. Looks like I should vote Liberals after all. They will steer Australia towards a downgrade bring the party to an end. They may even lose their false reputation for being good economic managers.

  2. ceteris paribus

    Australia must cut all “welfare”, in its multifarious guises, except that related to genuine personal, present need in the context of the Government budget.

  3. “The good ship SS Budget hit an iceberg in 2008 and the gunwales are now slipping below the waterline.”

    Yeah, if only we didn’t hit the panic button and build those school halls, install dodgy pink batts and send out stimulus cheques to dead people, then we’d still be in surplus.

    Canberra are always looking for a crisis to justify spending more of other people’s money. Doesn’t matter which party is in power.

    • Ronin8317MEMBER

      In the scheme of things, those were actually pretty cheap. Pink Batt’s only cost 1 billion, but it cost 1 to 1.5 billion to check all the places to make sure it’s not a fire risk. School Halls is a lot more expensive at 16.2 billion, while the ‘money to dead people’ cost about 5 billion per run, and it only happened twice. So total is about 30 billion, but they’re once off.
      What really blew up the budget deficit now is the drop in company tax receipt, cut in personal tax rates, the increase in pension, uncapping university places, Gronski, and NDIS. NDIS will be a monster. If you think the private education scam is bad, NDIS will be much, much worse.

      • SupernovaMEMBER

        Well saidRo! But the biggest monster is the lack of legal bureaucratic accountability right across the bureaucratic-sphere Rudd will retire continuing to legally-swindle we taxpayers for his Auzzie entitlements. Unbelievable…..and now he wants to run the UN……please!