Government debt is at a record high

Thu, 27 Sep 2018  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/government-debt-record-high-heres-good-news-013049695.html 

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Government debt is at a record high

In May 2014, then Treasurer Joe Hockey announced that the budget deficit for 2017-18 would narrow to just $2.8 billion. The projections in that budget indicated a return to surplus in 2018-19.

Fast forward a little over four years and Treasurer Josh Frydenberg and Finance Minster Mathias Cormann confirmed that the budget deficit for 2017-18 came in at $10.1 billion, nearly four times the estimate presented in the first Coalition government budget. Progress on repairing the budget has clearly been slow and marginal under the Abbott-Turnbull-Morrison governments, despite some of the strongest global economic conditions in a decade.
Policy actions of the Coalition over the five years it has been in office have actually damaged the budget balance with a raft of extra spending, and the quest for a return to surplus has been driven by a strong global economy, not local policy changes.

While the budget deficit was the smallest in a decade, the narrower deficit was based on unexpected riches flowing from surprisingly buoyant prices for iron ore and coal which have seen tax collection rise to levels also not seen in a decade.

This is not to sniff at the good fortune of the current government. It is always great news when the prices of our main commodity exports are strong. It adds to Australia’s national income, adds to government tax revenue and should always been welcome.

But it is important to realise it is simple luck rather than good economic management.

Prime Minister Morrison welcomed the budget numbers. He also suggests that a vote for Labor at the next election will be a vote for higher taxes. It is an odd claim, which according to his government’s own budget papers is based on perception, not facts.

The 2017-18 budget numbers confirm that the tax to GDP ratio jumped to 22.7 per cent of GDP, a level of tax that is higher than in every year of the previous Labor administration.

The tax take was around 1.5 percentage points higher than the average annual tax take of the previous Labor government. In today’s dollar terms, the tax take in 2017-18 is around $30 billion higher per annum than under Labor. That is a lot of extra tax we are all paying.

Which begs the question, which is the party of high taxes?

The picture on net government debt is more disconcerting.

The level of net debt hit 18.6 per cent of GDP which is the highest since the last 1950s and a time when the government was dealing with the debt build up that occurred in from the cost of fighting World War 2. By way of a further comparison, the level of net debt was just 10.4 per cent of GDP in 2012-13, the time the Coalition won the 2013 election. Suffice to say, the path of budget repair tracking more slowly than the Coalition promised when it took office 5 years ago.

It is still expecting a return to surplus next year or two, aided by the continuation of unexpectedly high iron ore and coal prices. The return to budget surplus also relies on extra tax revenue flowing from an acceleration wages growth and GDP continuing to grow at a 3 per cent plus pace. Many economists remain concerned that the commodity price level is vulnerable to a dip as the Chinese economy slow and global supply continues to rise. There is also a serious question about the wage pick up Treasury is hoping to see.

If there is any downside to these critical aspects of the budget numbering, the move to surplus will be delayed another year or two and with that, government debt will still rise.

Let’s hope commodity prices remain high and wages growth does eventually pick up and by this time next year, a strong economy has seen a long awaited return to a budget surplus.

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THE LATEST FROM THE KOUK

Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.