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.