No, in short, no matter how much the AFR applies the eggbeater to the yarn to fit the fixation of editor-in-chief Michael Stutchbury that we have a debt and deficit crisis. Indeed, S&P appeared to back right away from the Financial Review’s story this morning, saying “there is no immediate risk to Australia’s AAA rating”.
Moreover, it doesn’t particularly matter if it did downgrade us. Standard & Poor’s is the firm that downgraded the United States government from triple-A in 2011, with the rationale that the gridlock and brinkmanship in the US Congress over the budget had undermined “the effectiveness, stability, and predictability of American policymaking and political institutions”. S&P also downgraded France and several other countries on a similar basis. S&P now appears to be laying the groundwork for a similar observation about Australia if the Senate blocks key elements of the Abbott government’s budget.
We already know that Medicare co-payments, increases in higher education loan repayments and the government’s targeting of Newstart recipients will be blocked — Labor, the Greens and Clive Palmer have all said they’ll oppose them. That will eat up more than $6 billion of the $22 billion improvement in the budget bottom line over forward estimates from December “budget crisis!” Mid Year Economic and Fiscal Outlook and last week’s budget. And further blocks in the Senate will increase that: while petrol excise indexation and the deficit levy look safe, any other cuts will further reduce the actual improvement in the deficit.
On the positive side, however, it’s also hard to see the Coalition’s proposed 1.5% corporate tax cut, which will cost nearly $10 billion across forward estimates, get through the Senate either.
What the S&P warning reflects as much as the potential impact of a recalcitrant Senate is that, as the graph shows, last week’s budget didn’t actually do a lot to improve the deficit compared to the apocalyptic forecast Hockey produced in December, partly as a deliberate decision of macroeconomic policy — even with low interest fates and deficits in the tens of billions, economic growth is predicted to fall, so Hockey was correctly reluctant to cut harder, sooner — and partly because the pain directed at low- and middle-income earners, foreigners, the young and students is offset by increasing generosity to corporations and high-income earners via the tax system.
But if S&P did cut our rating, what then? Well, there would be mass cheering in corporate circles and down at Martin Place at Reserve Bank headquarters in Sydney, and there would be some restrained, muttered chortling, because life would have gotten easier. At least, that’s the theory.
The Reserve Bank doesn’t particularly respect Standard & Poor’s and its incorporation of politics into the their ratings. If you look at the US, its position has improved immeasurably in the past year, despite S&P’s downgrade. Moody’s and Fitch didn’t change the US rating, and later this year a very chastened S&P will lift the US rating back to AAA — it has changed its US outlook from negative to positive, which says an upgrade is on the way.
Global interest rates are likely to stay at their current low levels for the next couple of years (some former central bankers reckon five years) because of low inflation and the continuing impact of quantitative easing. In the US, quantitative easing is being wound back, but in the UK, it’s in place and not changing; in Japan, it’s in place and could be increased if economy slows; and in the eurozone, a big announcement on some sort of easing is expected in two weeks’ time at the European Central Bank meeting.
And besides, ratings cuts haven’t altered the ability of the US to borrow, nor have negative outlooks damaged the UK’s borrowing costs. And all those pariahs in the eurozone — Italy, Greece, Spain, Portugal, Ireland and France — can all now borrow at rates much cheaper than at any time in the past eight years or more. In normal times, credit ratings have an impact on borrowing costs, but these are not normal times and won’t be for several more years as the global economy and the global financial system recovers from the devastation caused by the GFC.
A loss of our AAA rating would result in more downward pressure on the dollar, which in turn would be welcomed by exporters and tourism operators. Beyond that, the economy would not be damaged one bit.
As for the government, there’d be mixed feelings: it could use a downgrade as leverage on the crossbenches in the Senate, and a lower dollar would be a boon for the budget bottom line, but it would also leave the Coalition exposed to Labor’s charge that it has thrown away the triple, triple-A rating that Wayne Swan secured as treasurer.
A senior Reserve Bank official, Guy Debelle, the assistant governor in charge of financial markets, is due top speak in Adelaide today. It will be fascinating to hear his remarks on the AFR story and S&P. He is due to speak around 1.15pm Sydney time.