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.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
By Leith van Onselen The Committee for Economic Development of Australia (CEDA) yesterday released a 193-page report entitled A Federation for the 21st Century, which examines key issues for Australia’s federal system of government and assesses what can be done to improve the current structure and policy outcomes. The report identifies key areas where changes,
Chris Weston, Chief Market Strategist at IG Markets It’s been a fairly lethargic open to the trading week here in Asia. However, it promises to be an interesting week due to the macro economic backdrop. Last week, global equities staged a solid rebound as earnings from the likes of Caterpillar, 3M, Boeing, Dow Chemicals and
By Leith van Onselen Prime Minister Tony Abbott delivered a sensible speech over the weekend, whereby he called to fix the “dog’s breakfast” of federation by working to resolve the mis-match between the states responsibilities and their revenue bases: We certainly have a national government and yet we have an unsatisfactory system of governance, because
By Leith van Onselen Deloitte Access Economics has warned of the massive likely hit to the Federal Budget if China’s growth slows more quickly than expected, noting that such an event could turn the Budget into a “fiscal fiasco”. From The Australian: …forecasts assume that China manages a very gradual slowing in its growth, but
Cross-posted from The Conversation: Australia’s Pharmaceutical Benefits Scheme (PBS) is one of the few pieces of national public health policy with unquestioned democratic legitimacy. It was established by the vote of a majority of citizens in a majority of states in a referendum in the late 1940s. Since then, it has lowered the cost of
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Not sure where this chap was when the WA budget was drawn up. From The West Australian, Acting Under-Treasurer Michael Barnes: After visiting several Chinese cities, including Hohhot, the capital of Inner Mongolia, Mr Barnes said he was convinced the sector was due for a severe correction. …”As far as the eye can see there are
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An excellent piece from Laura Tingle over the weekend summarised the state of the Federal Budget: In all, including $19.4 billion of ‘appropriations’ which traditionally Parliament does not block, the government has to date got Parliament to agree to cuts worth $25 billion over the next four years. But a further $23 billion of budget measures remain
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Weeoo, weeoo, weeoo. From The Pascometer: Joe’s had a big win at the Forex casino. …Hockey loaded up last financial year’s “Labor” budget with an $8.8 billion capital injection for the RBA. The RBA didn’t ask for it, didn’t really need it, but certainly went for all it could carry when the offer was made as
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