Australian budget

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.


Worsening Budget needs more than nip and tuck

By Leith van Onselen The Committee of Audit panel yesterday appeared before a Senate Inquiry, with Committee head, Tony Shepherd, describing Australia’s public finances as “good but deteriorating”, whilst declaring that the Committee would be guided by “fairness” and would ensure that any recommendations to privatise public assets contain safeguards t0 protect the quality of


Growth won’t fix the Budget

Find below a useful piece from the Grattan Institute that makes the clear point that improved economic growth won’t fix the Budget. It fails to observe that the painful cuts and tax rises it proposes won’t fix the budget either owing to the fiscal drag and multipliers effect, as I described this morning. But hey, you can’t


Ratings agencies coy on MYEFO

From the AFR: Moody’s Investors Service senior vice president Steven Hess said the budget update revealed “somewhat worse projections” than expected for both fiscal and debt positions. “The lowering of the GDP growth forecast next year and the resultant substantially larger fiscal deficits are clearly credit negative for the government’s debt position,” he said in



Well, well, don’t let Joe Hockey fool you. He a bear! A big growling, grizzly bear. He has bashed Treasury into some dour forecasts for the Mid Year Fiscal and Economic Outlook, below those of the RBA and on a par with more bearish private forecasts. These are almost down the MB levels. Here are


Structural deficit is Hockey’s elephant in the room

By John Freebairn, cross-posted from The Conversation. Media reports preceding the mid year economic and fiscal outlook suggest we should expect a deficit of just under A$50 billion, a further deterioration of Australia’s budget position since the pre-election figures were released in late August. Such a deterioration underlines the continuing budget policy conflict facing both


Abbott abandons surplus

From the AFR this morning: Ahead of Tuesday’s release of the Mid-Year Economic and Fiscal Outlook, Prime Minister Tony Abbott indicated a 2016-17 surplus was unrealistic. “We said we would return the budget back to surplus at least as quickly as Labor had proposed. What we are discovering the more we dive deeply into the


Australian mid-year budget update: a preview

From Westpac: Australian Federal Treasurer Hockey will release the Mid-Year Economic & Fiscal Update (MYEFO) on Tuesday December 17. This, the first budget update of the recently elected Abbott led Coalition government, is a significant document. MYEFO will provide the most current dollar estimate of the likely budget deficit for this financial year. The expectation


State governments caught in the Budget vice

By Leith van Onselen Two articles have emerged today outlining the acute pressures facing state government Budgets as they struggle with rising debt loads and the threat of credit ratings downgrades. The first, from The Australian, outlines how Queensland’s Newman Government is looking to sell-off public assets in order to pay down debt, which is


There are plenty of other fingers in the Budget pie

The Guardian’s Greg Jericho (aka “Grog’s Gamut”) has posted a detailed article today putting into perspective the level of taxpayer assistance provided to the automotive industry and showing that there are plenty of other sectors with their fingers in the Budget pie: From the talk by some commentators and government ministers you would think the


Uren: Hockey’s Budget shocker risks doom loop

David Uren has a nice piece today at The Australian describing the MYEFO process: NEXT Tuesday’s budget update will be a shocker…There is a danger that the new government’s first major economic statement will extinguish what was an incipient economic recovery.  …Hockey’s defence is that he has no alternative but to tell the truth about


Revenue, not cuts needed to balance Budget

By Leith van Onselen The Australian Council of Trade Unions (ACTU) has produced a good research note arguing that the Commission of Audit should focus on ways to boost Government revenue rather cutting expenditure, in particular by reforming the inequitable and unsustainable superannuation system: Australia’s governments, taken together, are smaller as a share of the


Aussies refuse to work longer

By Leith van Onselen In early 2003, I joined the Australian Treasury where I was immediately introduced to the Department’s “Three P’s” framework, which effectively argued that Australia needed to: 1) boost productivity; 2) raise workforce participation; and 3) increase the population via skilled migration, if the nation was to continue to enjoy rising living


$40 billion black hole now

From Peter Martin (who’s Treasury sources are excellent) today: The budget update to be unveiled next week will forecast a deficit of about $40 billion and a peak in debt of more than $400 billion. The figures are well above the forecasts of $30 billion and $370 billion in the Treasury’s pre-election budget update released


Black hole to be unveiled next week

From the AFR: The government’s mid-year economic fiscal and economic statement will likely be released next week and will contain a projected figure for peak debt, according to Treasurer Joe Hockey. During an interview with ABC Radio on Thursday morning Mr Hockey said the statement would be released “in the next few days” but a spokesperson


Hockey: weak growth to worsen Budget

By Leith van Onselen From The AFR this afternoon comes news that the Federal Budget is likely to deteriorate further following today’s disappointing GDP results: Annual growth in GDP was 2.3 per cent. That is below Treasury’s last forecast for growth in the 2013-14 financial year of 2.5 per cent, released as part of the


Decades of Budget deficits without reform

By Leith van Onselen Private consulting firm, Macroeconomics, issued updated Budget forecasts yesterday, which warned that Australia faces a decade of deficits unless cuts are made to spending: The firm believes the short-term underlying budget position has improved since the September election, although this year’s deficit will be slightly worse than the official $30.1 billion


One-eyed Newman continues Labor blame game

By Leith van Onselen Earlier this month, the head of the Prime Minister’s Economic Advisory Council, Maurice Newman, delivered a one-eyed speech to the Committee for Economic Development of Australia (CEDA), where he blamed the former Labor Government for the economy’s and Budget’s woes: After having watched five long years of reckless spending, economic waste,


How to free the budget from of the aged claw

By Leith van Onselen Recent reports released by the Grattan Institute and the Productivity Commission looking into the sustainability of the Federal budget as Australia’s population ages have generated some much needed debate on Australia’s retirement system, which is looking increasingly unsustainable. Just to recap, the Australian Bureau of Statistics (ABS) released it latest population


Labor ducks retirement policy reform

By Leith van Onselen Yesterday, I questioned whether anyone in today’s crop of politicians would have the cojones stare down vested interests and clearly articulate the need for reform and ‘shared-sacrifice’ as the once-in-a-century mining boom fades and Australia’s population ages, which will place huge pressure on the Federal Budget (see below chart). Today, the


Everyone wants a free lunch on ageing

By Leith van Onselen Fairfax’s Tim Colebatch has written a timely piece on the need for the public to confront the economic realities of an ageing population and the necessary adjustment that must be made to retirement policy: They say a country gets the leaders it deserves. If so, what does this lot say about


Abolish negative gearing to save Budget billions

By Leith van Onselen While the Grattan Institute’s new report, Balancing budgets: tough choices we need, was centred around winding back entitlements to older, wealthier Australians, it also included a section on abolishing negative gearing, which it claims would save the Budget around $4 billion per year initially, falling to a saving of around $2


Three reforms to fix Australia’s retirement system

By Leith van Onselen Business Spectator’s Callum Pickering has this afternoon provided some sensible suggestions on how to improve the sustainability of Australia’s retirement system, which echos reforms proposed by me previously (for example, see here and here): To address rising age pension expenditures, I’d recommend a couple of things. First, the asset test for