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 misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.