Wayne Swan deserves to be feeling good today. Overnight, the OECD predicted that Australia would rack up 4% growth in 2012, standing out like a beacon amid the economic carnage unfolding elsewhere. If you’ve got 4% growth, you don’t need the government providing additional stimulus by running a deficit. Swan’s case for keeping the 2012-13 surplus by hacking into spending to offset revenue falls, which was always essentially political, now has some economic basis for it.
Even better, this morning Fitch’s rating agency lifted Australia’s credit rating from AA+ to AAA. “The combination of low public debt, a freely floating exchange rate, a credible inflation target framework, and liberal trade and labour markets provides Australian authorities the flexibility to run strong counter-cyclical fiscal and monetary policies during both economic downturns and upturns,” the agency said, handing the government a ringing endorsement of its policies. It sees “low general government debt-to-GDP ratio — 26.3% of GDP in FY2010-11 — as one of the sovereign’s standout strengths. In comparison, the ‘AAA’ peer rating group median was 55.7% of GDP in 2010.”
In short, at a time when major economies are facing credit downgrades (from ratings agencies suddenly a lot more vigilant than they were before the GFC), Wayne Swan’s economy is going the other way. UK commentators are talking of Australia as a safe haven from the chaos in Europe.
In that context, the pea-and-thimble trick Swan is playing with the 2012-13 surplus is almost, well, beneath him.
The 2012-13 surplus has been preserved, albeit just barely, pared down from $3.5 billion to $1.5 billion. But at what cost? Well, literally at the cost of $5b worth of spending brought into this year so that it won’t bump up spending next year. That will push government payment growth up to 3.7% this year, for a deficit of over $37 billion. It will fall by 3% in 2012-13 but then, showing that some spending has been pushed back as well as forward, it will return to 3.3% growth (for a Budget surplus of $1.9 billion that year).
Admittedly there’s some basis for the bring-forward. Growth will be weaker this calendar year than next (1.8%, the OECD says). Better to bring spending into this year to support a softer economy than spending it next year, when growth is roaring back. But the budget of course operates on financial years, and much of the “brought forward” spending won’t get out the door until early-mid 2012. The government forecasts growth of 3.25% both this financial year and next.
In terms of impact on demand, it won’t make much difference when the spending happens, but it makes a big difference to whether there’s a plus or a minus next to the cash balance. The net result is that public demand will actually fall in 2012-13, by 1.25%.
A more diligent government would have pared back spending even more rather than play this game of shifting spends back before June 30 or into the following year. It has racked up some decent spending and tax expenditure cuts, although the 2.5% additional efficiency dividend imposed on the public service risks starting to impair the bureaucracy’s capacity to functional effectively — there’s only so much advertising, travel and tea-and-bickies you can cut back on before you need to start getting rid of positions. It’s also taken another nibble at middle class welfare via the baby bonus and super changes (and, arguably, the living-away-from-home allowance for foreign workers).
But the whole framework is predicated on significantly slower economic growth globally, with world GDP forecast to grow at only 3.5% next year, compared to the Budget estimate of 4.5%. That, ultimately, is where the real threat to Swan’s numbers come from. The Eurozone could collapse at any time, belting consumer confidence here and delivering a shock to demand via China and the mining sector.
Our biggest miners are already warning that their customers are facing a credit freeze. In a few weeks, today’s numbers might look like a faint signal from happier times as Europe plunges into a deep recession, with attendant consequences for social order and the continent’s political landscape.