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 My cousin, Peter van Onselen, wrote a cracking article in The Australian over the weekend calling for reform of politician entitlements, which costs taxpayers a whopping $500 million a year and are often misused: Make no mistake, we should dwell on what Bishop did when she took a helicopter at taxpayers’
Fresh from S&P, here is another reason for Aussie weakness today: OVERVIEW The sovereign credit ratings on Australia benefit from the country’s strong institutional settings, its wealthy and resilient economy, and significant monetary and fiscal policy flexibility. The country’s high external and household indebtedness, as well as vulnerability to weakening commodity export demand, moderate these
I noted Wednesday that Capt’ Glenn’s embrace of notions of secular stagnation had punched a huge hole in Bozo Joe’s Budget outlook and today David Uren sticks his head through it to find a gaping maw: Reserve Bank governor Glenn Stevens’ warning on Wednesday that Australia’s potential growth rate may have fallen permanently would have
By David Collyer, cross-posted from Prosper Australia: The Housing Industry Association’s Harley Dale and the Urban Development Institute’s Michael Corcoran have called for the repeal of Stamp Duty in favor of a broad-based land tax, News Corp reports. Both lobby groups fear an extension of the GST to building products, which would be passed on
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From Fairfax: Hundreds of thousands of building industry contractors who may have dodged their GST or income-tax obligations have been hit with $2.3 billion in tax bills. But there could be billions more outstanding, as the Australian Taxation Office (ATO) continues data matching information reported to it to identify operators in the cash economy. A reporting
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By Leith van Onselen Last month, new Queensland Treasurer, Curtis Pitt, made waves when he argued that the state economy was in recession in late 2014 – a view supported by the latest national accounts, which showed Queensland state final demand contracting for seven consecutive quarters in trend terms (see next chart). Yesterday, Pitt revealed
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