At some point the Coalition — assuming, as is still the assumption in Canberra, that Prime Minister Malcolm Turnbull falls over the line on July 2 — is going to have to break its addiction to spending.
The conservatives are the big spenders of Australian politics — a fact apparent for years but to which many in the media are only now waking up to. Even including Kevin Rudd’s unprecedented — and massively successful — stimulus spending in 2009, and including 2013-14, when the Coalition loaded billions in extra spending into the back end of that year and blamed it on Labor, Labor only averaged spending of just above 25% of GDP. So far the Coalition has managed 25.7% and the coming budget year will be 25.8%. Even in 2019-20, now the last year of forward estimates, the Coalition still plans to be spending 25.2% of GDP, above the level it inherited from Labor.
It has helped the media’s realisation that Scott Morrison — and this is to his credit — continues to claim the government has a revenue problem, and helpfully offered a chart yesterday to show it. He told the assembled media that the work of getting spending down would have to occur over a succession of budgets.
Using spending as a proportion of GDP can be misleading, because it’s the GDP denominator that will end up changing more than the spending numerator. So spending this coming budget year, 2016-17, has hovered between $443 billion and $447 billion since 2013, when it first appeared in the forward estimates. But during that period, GDP growth has been significantly revised downward, meaning, as a proportion of GDP, spending appears to have surged. But the fact is that despite the arrival of Tony Abbott’s fiscal fire crew (you remember, the one whose mere presence got things under control, even before they turned on the hoses), the Coalition has done nothing to lower that spending figure — it’s now a little higher. And bear in mind, the current figure from last night’s budget — $445 billion — assumes the Senate passes savings measures still lurking in the budget papers from the 2014 budget.
It’s not all bad news on fiscal discipline: the government has gone further than expected in curbing superannuation tax concessions; its changes will generate $4.4 billion in revenue over forward estimates and much more over the longer term, and they are changes that will upset the Liberal Party’s own base — a preparedness to upset your own base is always a good sign in a government. But there are too few quality changes like this, and too many like the gratuitous tax cut for people on $80,000 that will be trivial for the recipients but will cost $4 billion over four years alone.
The result — further deficit blowouts and another year’s wait to return to surplus. Which means more debt. According to the budget’s Debt Statement, Assets and Liabilities section, the end-of-year face value of Commonwealth government securities (CGS) on issue “is expected to be $497 billion in 2016‑17 and is expected to increase to $581 billion in 2019-20. By the end of the medium term (2026‑27) the total face value of CGS on issue is projected to rise to $640 billion.”
Debt is forecast to rise from the $410 billion (24.0% of GDP) estimated in last year’s budget papers for the current financial year to $425.7 billion this year (or 25.7% of GDP), and in the coming 2016-17 year, forecast debt will grow from the last year’s estimate of $450 billion (25.2% of GDP) to $497 billion (28.9%). It also goes up in 2017-18, to $542 billion, or 30% of GDP, from $470 billion, or 25.0%, as forecast last year. That 2018 figure of 30% of GDP is the current forecast peak; and that year the market value of the debt is estimated to peak at 32.6% of GDP.
Now, net debt is the measure correctly favoured by the government because it includes offsetting holdings of cash and other securities; it gives a better idea of the government’s finances. Ratings agencies focus on that, but they also look at the gross figure. And that 30% gross debt threshold is important, because it will prompt increased scrutiny of our AAA credit rating. The comments on the budget by ratings agencies will be of interest in coming weeks. They’ll also be more concerned about the economy. Treasury has downgraded its GDP forecasts for next financial year (down to 2.5%) and the RBA is now worried about deflation and its impact on growth, jobs and demand.
And on Friday, we’ll get the latest economic forecasts from the RBA with the release of its second Statement on Monetary Policy for 2016. Nominal GDP growth may be the most important indicator for budget revenues: the budget forecasts nominal GDP to grow from 2014-15’s 1.6% to 2.25% this year and 4.25% next year (and 5% the year after). That’s a heroic belief when inflation is weak and not expected to strengthen any time soon (hence the RBA rate cut yesterday). Indeed, the first question in yesterday’s budget lockup was from Dennis Atkins asking why the nominal GDP forecast was so optimistic. Morrison visibly didn’t know the answer and resorted to boilerplate.
The only real hope for reducing this debt path is for the government — whether it’s led by Turnbull or Shorten — to go hard after spending in the first budget of the next term of Parliament. Of course, we saw how badly that could go off the rails if done poorly and without fairness in 2014. And if the government is returned, that hope relies on the Coalition developing a fiscal fortitude it has hitherto failed to display. Governments that start off disciplined eventually go bad. There are no recorded cases of governments starting off bad and somehow finding the path of discipline. Perhaps Turnbull will be unique in that regard. But don’t bet our credit rating on it.