As Crikey suggested on Wednesday, the ratings agencies appear underwhelmed by this week’s budget, which blows out the deficit further and delays the return to surplus until 2020.
Yesterday, Moody’s raised serious concerns about the plausibility of the projected path back to surplus, suggesting that the government would be politically constrained from curbing spending – a valid assumption based on the lack of fiscal discipline from both the Abbott and Turnbull governments this parliamentary term. The agency also took aim at one of the more optimistic forecasts in the budget on nominal GDP growth.
“Moody’s sees a mixed economic environment for the FY2017 budget, and while forecasting robust real GDP growth at around 2.5% during FY2017, also expects lackluster [sic] nominal growth, weighed down by muted corporate profitability and wage growth, which will adversely affect budget outcomes. This expected modest nominal level of GDP growth will challenge the government’s revenue projections.”
That’s a subtle way of saying Moody’s really doesn’t believe the numbers — and especially nominal GDP, which we flagged as a concern. That is forecast to rise from 2.5% this year to 4.25% next year (MYEFO forecast 2016-17 nominal GDP growth at 4.5%, so it’s been downgraded a little since December). This morning, the head of Treasury, John Fraser, appeared before Senate estimates (hearings the governments didn’t want, but which were foisted on it when Labor sprung them as a surprise during that special ABCC sitting of Parliament). Fraser emphasised the importance of nominal GDP growth and its links to revenue growth, demonstrating how much is riding on Treasury getting that call right.
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Imagine an alternate universe in which Labor was still somehow in power, and that it was heading into an election with a major ratings agency warning that its savings and spending projections didn’t look realistic. And imagine what the media — especially the Australian Financial Review and The Australian — would be making of it.
This morning’s Reserve Bank Statement of Monetary Policy isn’t entirely helpful for the government’s forecasts. Its economic forecasts are essentially a continuation of what we have seen for much of the past year, based on an improving labour market, terms of trade and household consumption, producing overall growth about trend, or just a bit less. Outgoing governor Glenn Stevens says in his foreword:
“There has been no material change to the forecast for GDP growth or the unemployment rate. GDP growth is expected to strengthen gradually to an above-trend rate, reflecting the effects of low interest rates and the depreciation of the exchange rate since early 2013. Both have been helping activity to rebalance towards the non-resource sectors of the economy… The outlook for the unemployment rate is consistent with spare capacity remaining in the labour market throughout the forecast period.”
But it is in the extensive discussion of inflation that the RBA’s biggest concerns emerged in a typically guarded elaboration of the comments Stevens made in his post-meeting statement on Tuesday when the bank cut rates. The Bank’s Consumer Price Index estimate for the year to June to just 1% (a record low) from the 1.3% rate reported for the March quarter; the RBA’s target rate is 2% to 3% “over time”, so that is a big downgrade.
That suggests another very low (perhaps a second negative) reading is expected in the current quarter. At the same time the RBA has cut its underlying rate to 1.5% for the year to June, and it is forecast to be 1% to 2% for the rest of the year, along with headline inflation. Both the underlying and headline rates could reach the target rate by June next year, but the bank isn’t certain, noting that “despite above-trend growth in economic activity and improvements in labour market conditions over the past year, it is possible that domestic cost pressures may weaken further, and so inflation may not pick up as expected.”
The other area of concern for Moody’s is that they simply don’t think that the government will have the political will to cut spending:
“Limits to the effectiveness of spending restraint are further evident. With education, health, social security and welfare accounting for around 60% of total spending, achieving significant expenditure restraint will be challenging and commitments in these areas risk largely offsetting efficiency savings.”
That advice, needless to say, applies to whoever emerges the victor from the election campaign we’re about to enter.