Our Rolls-Royce budget can handle a flat tyre

Sun, 06 Apr 2014  |  


This article, written on behalf of Per Capita, first appeared on The Drum website:


Australia is in a fine budget position and the deficit isn't nearly as big an issue as some politicians would have you believe. Just ask the credit rating agencies, writes Stephen Koukoulas.

The budget debate in Australia is so pathetically inane that the fiscal blame game has reached a point where neither side of politics wants to take responsibility for Australia's triple-A rated fiscal settings.

This perverse situation shows up with the notion that debt and deficit are political poison rather than the medicine that, when used wisely, has delivered spectacular wealth-creating returns for the economy.

To an impartial observer, the argument of whose government debt is it, is akin to asking who is to blame for getting a flat tyre on a Rolls-Royce. Is it the driver, the builder of the road, the tyre manufacturer or the pesky interloper who dropped a couple of nails on the road?

In this case and in terms of Australia's budget position, it matters little because the budget position and economy are of Rolls-Royce quality and the job of fixing the fiscal flat tyre is straight-forward and a low order issue.

In considering the debate over debt and deficit, the view from those with no political axe to grind over Australia's budget position is enlightening. The credit rating agencies uniformly rated Australia's sovereign debt position triple-A at the end of 2011, clearly in the aftermath of the global financial crisis that took account of debt and deficit policy measures used by the government to avoid recession and cap the unemployment rate below 6 per cent.

That triple-A rating was maintained in the period up to and including the 2013 Budget delivered by Wayne Swan. The ratings agencies reiterated that superior credit rating during the election campaign when the pre-election fiscal outlook (PEFO) document was released by the Departments of Treasury and Finance.

But even more importantly than that, just three months after the election, Treasurer Joe Hockey and Finance Minister Mathias Cormann imposed a range of policy measures and economic parameter variations on the budget numbers. These were incorporated into the mid-year economic and fiscal outlook (MYEFO) and even the doubling of the budget deficit from $55 billion to $123 billion over the forward estimates did not alter the view of the ratings agencies that Australia's financial position was still triple-A with a stable outlook.

All of which means that even after Treasurer Hockey doubled the budget deficit in the MYEFO, the ratings agencies confirmed their assessment that Australia's fiscal settings are imperious.

That is as it should be given the fact that the budget deficits, on a worst case as outlined in MYEFO, are chicken feed at about 1 per cent of GDP from 2016-17 and beyond. On a best case and even without further significant spending cuts, are on a trajectory to surplus in a few year because of the stronger than expected economy.

What is important now in the lead into the budget on May 13 is for the Government to work out how best to tilt fiscal policy settings a little more towards budget surplus, do it fairly, equitably and without pulling the rug out from under the improving economic growth momentum that has been evident since the middle of 2013.

Not much more than a tilt is needed as the PEFO numbers showed that, with the economy growing near trend, surpluses would be the order of the day from 2016-17 and beyond. A tilt might be net savings of about 0.25 per cent of GDP per annum, which in 2014-15 terms, is about $4 billion. With the economy clearly stronger than assumed at the time of MYEFO, the automatic stabilisers are also working hard to kick the budget bottom line into surplus.

That is, of course, if the Coalition Government's spending plans don't blow the budget out of the water. A couple of big-ticket items are on Prime Minister Tony Abbott's agenda that have some budget risk attached. These are the incredibly expensive paid parental leave scheme, the infrastructure spend that is yet to be specified and the plan to lift defence spending to a huge 2 per cent of GDP.

The spend on these, in 2014-15 dollar terms, amounts to approximately $15 billion a year and more if the infrastructure spend is upsized. This is a massive spending spree that, unlike the stimulus measures during the global crisis in 2008 to 2010, are embedded into the structure of the budget.

In the meantime, Australia has some of the best budget settings in the world, with one of the lowest levels of government debt and a deficit problem that almost every other advanced economy would take in a moment.

It is a pity the Government is reluctant to embrace this quite fantastic economic news as it puts a higher ranking on political pointscoring than articulating the need for some spending adjustments and locking in the return to surplus as a simple task without too much economic pain attached to it.

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Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/watch-out-australia-theres-a-flood-of-dismal-economic-news-on-the-horizon-211110783.html


Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.