By Leith van Onselen Late Friday, Business Day’s Michael Pascoe continued his good recent work arguing that Treasurer Joe Hockey is placing politics ahead of the national interest in demanding that the Federal debt ceiling be raised from $300 billion to $500 billion, instead of the more moderate $100 billion extension agreed to by Labor
The Australian Budget has a history of running small deficits and surpluses with occasional blowouts. Contemporary history has seen General Government net debt to GDP approach 20% under Labor in 1995 and the Coalition in 2017. In between, a Coalition government under Prime Minister John Howard and Treasurer Peter Costello ran surpluses sufficient to pay net debt down to zero during Australia’s mining boom.
Ratings agencies have adjusted the sovereign credit rating over time to reflect this ebbing and flowing of debt. In 1975, Standard and Poors rated Australia AAA. By 1989 the rating had dropped two notches to AA. It was subsequently upgraded again to AAA as the Howard Government operated consecutive surpluses.
The major vulnerability for the Australian Budget is the external imbalance in an economy that runs persistent current account deficits. Because Australian banks borrow so much money in international markets largely to fund domestic mortgages they are constantly at risk of international liquidity shocks.
The Australian Budget steps in with public guarantees to the banking system when this happens. Thus, although the Australian Budget has relatively low debt-to-GDP metrics, credit rating agencies demand that they remain that way to preserve the AAA rating as a backstop to bank borrowing.
Australian politics insists that Australia sustain budget surpluses ostensibly because it is equated with good economic management. In truth, the surplus is simply a figment of the property bubble at the heart of the Australian economy that requires the support of the tax-payer to persist. The Australian Budget is the key stone in the Australian credit arch.
In recent years the Australian Budget has deteriorated as the structure of the economy has left is denuded of growth sources. As the mining booms passed and the enormous household debt (186% of GDP) stalled consumption and investment, fiscal deficits became a key component in GDP growth.
As well, the disintegration of Australian political integrity associated with the end of the mining boom period doomed the Budget to successive regimes of neglect.
This very obviously undermined its role in the above system exposing Australia to deeper adjustments during future periods of global stress.
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By Leith van Onselen The Federal Coalition is good at manufacturing crises. While in opposition, they continually labelled the former Labor Government as economic vandals, declaring a “budget emergency” and voting against Labor’s bill to increase the Federal Government debt ceiling to $300 billion in May 2012. Now in Government, the Coalition is once again
By Leith van Onselen Karma is a bitch. After spending five years lambasting the former Labor Government over their so-called reckless spending and a “budget emergency”, and voting against similar moves when Labor increased the debt limit to $300 billion in May 2012, Treasurer Joe Hockey’s bill to increase the federal debt limit to $500
By Leith van Onselen Ironic, isn’t it. After spending five years lambasting the former Labor Government over their so-called reckless spending and a “budget emergency”, Treasurer Joe Hockey has threatened spending cuts if Labor and the Greens do not pass the proposed increase in the Federal Budget debt limit from $300 billion to $500 billion
By Leith van Onselen Last night, the head of the Prime Minister’s Economic Advisory Council, Maurice Newman, delivered a speech to the Committee for Economic Development of Australia (CEDA) urging the Government to embrace economic and fiscal reform, whilst blaming the former Labor Government for the economy’s and Budget’s woes. There was some good aspects
By Leith van Onselen Treasurer Joe Hockey has this morning flagged that the Budget outlook will be “substantially worse” by the time that the Mid-Year Economic and Fiscal Outlook (MYEFO) is released in December. From the AFR: “It’s extremely challenging and before Christmas I will release the actual state of the books in what is
Cross-posted from The Conversation A supposition behind the Commonwealth’s Commission of Audit is that government has become “too large”. The first paragraph of the Commission’s terms of reference sets the context, stating: During this time [the last 20 years] the size of the Commonwealth government has expanded significantly, as has the remit of some of
In case you didn’t know, last the Australian Office of Financial Management released its annual report last night and there are few tidbits worth a mention. First, the AOFM RMBS portfolio continues to deliver you a modest return. You may recall that: The Australian residential mortgage-backed securities (RMBS) market is acknowledged as a critical source
The Kouk wants Joe Hockey to slash spending: The previous government did this with each budget and economic update. In the last four years, the average growth in real government spending was 1.3 per cent, well below the long run average growth rate of 3 per cent. But even with this restraint, it failed on
A few commentators have already drawn attention to Tony Abbott’s failure shift from political bovver boy to prime ministerial trappings. His recent trip around Asia was marked by several gaffes including a bizarre apology to Malaysia for his own treatment of the asylum-seeker issue. And now, in the US, he still dragging up Labor bashing.
The SMH is reporting that: Fitch Ratings says the federal government’s move to raise the debt ceiling was unlikely to result in any near-term loosening of policy and they did not expect Australia’s AAA-rating to be threatened. The credit rating agency said overnight that while the debt ceiling hike to $500 billion was a “significant increase
From AAP: The Rudd government’s decision to impose a ceiling on itself was always more political than practical. When it came to power in 2007, [Rudd] inherited negative net debt from the Howard government, a turnaround from the $90 billion debt left to the coalition by the Keating government. Kevin Rudd had won an election
By Leith van Onselen The Australian’s David Uren has published an article today imploring the newly established Audit Commission to tackle Australia’s ballooning pension payments, which are projected to skyrocket as the baby boomers enter retirement, as well as to address the sustainability of the superannuation system: At the top of the list [for reform]
For years now I’ve argued that the Australian budget will never again return to surplus. This is not a political statement, it is an economic one. We simply can’t do it. As public sector spending is cut, the amount of private sector borrowing required to support the economic growth needed to boost public receipts is
By Leith van Onselen There are a few articles out today endorsing selling Australia’s public assets in order to fund new infrastructure investment. The AFR seems to be leading the cheerleading, with Tony Shepherd arguing that public assets are generally better-off in private hands, and that the proceeds of such sales can be leveraged into
By Leith van Onselen Deloitte Access Economics has issued a new warning that restoring the Federal Budget to surplus would be a “a herculean task” in light of the raft of new spending commitments in the areas of disability care, schools and parental leave, and well as increasing costs associated with medical and aged care.
Ironically, Joe Hockey is on a mission to New York to increase Australian debt:. From the AFR: As Treasurer Joe Hockey prepares to travel to New York to meet his budgetary masters at rating agencies Standard & Poor’s and Moody’s, he faces a real challenge. Can he convince these powerful institutions that have more influence over
S&P is out with something of a warning for state budgets, cutting its expectations of GST revenues: We make adjustments to Australian states’ forecasts for GST revenues to make them consistent and comparable, and to ensure that our base case adequately reflects our view of any potential deviation between forecasts and actual GST receipts. All
From The Australian over the weekend: FINANCE Minister Mathias Cormann has warned of a hit to the economy from the sharp rise in the dollar as he and his colleagues mull a delay in the next budget update to deal with the threats. As global forces push up the currency, the Abbott government is confronting new
By Leith van Onselen Above is an interesting interview on Switzer TV with Chris Richardson from Deloitte Access Economics discussing the outlook for the Federal Budget. According to Richardson: Australia should have stronger public finances in the wake of the once-in-a-century commodity boom. Spending problems go back more than a decade. Both sides took a
By Leith van Onselen Economic and financial forecasting is tough at the best of times, let alone for an $1.4 trillion economy that is subject to a myriad of competing influences that can change track at the blink of an eye. For this reason, I don’t envy the Australian Treasury when it attempts to forecast
By Leith van Onselen The Australian Treasury has just released the Pre-Election Economic and Fiscal Outlook (PEFO), which shows minimal changes changes to its economic, budget and revenue forecasts since its economic statement released on Friday 2 August (see here for Houses & Holes’ earlier analysis). Below are the projections for the key macroeconomic parameters:
By Leith van Onselen The Western Australian Government late yesterday handed down its State Budget, which contained the following headline numbers: Western Australia’s economy is forecast to grow by 3.25% in 2013‑14 before falling to 2.5% in 2014-15. Western Australia’s unemployment rate is expected to peak at 5.75% in 2014-15, before tapering to 5.25% by
By Sam Oldfield, who is an economics student at Latrobe University and an Associate at Prosper Australia. The Rudd government’s sudden increase in cigarette taxes completely disregards sound economic practice. Joe Hockey calls it “policy on the run” – he couldn’t be more correct. Making smokers the targets of Kevin Rudd’s war on anything bad
From the AFR: The federal government faces a forecast revenue shortfall of more than $20 billion over the next four years, prompting a robust internal debate about whether the budget razor gang should make cuts to offset all the losses or delay the surplus yet again. Cabinet’s Expenditure Review Committee is due to meet again on