Australia’s hard-earned triple triple-A credit rating, secured by Wayne Swan in 2011, now looks almost certain to be lost when ratings agency Standard & Poor’s downgrades us — unless there’s a dramatic turnaround in the Coalition’s approach to fiscal management in the next six months to a year. S&P have not merely flagged their concerns about how difficult it will be for any government to get fiscally stringent measures through parliament, they’ve called bullshit on three years of fiscal fantasy from the Coalition.
In its statement yesterday, S&P spelt out its deep scepticism of the government’s current fiscal trajectory:
“We are revising the rating outlook on Australia to negative from stable because we believe that without remedial action the government’s fiscal stance may no longer be compatible with the country’s high level of external indebtedness … The negative outlook reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating.”
From the point of view of ratings agencies, a major concern about both Labor and the Coalition is that they have kept pushing the return to surplus out ever since Swan gave up his commitment to return to surplus in December 2012 because he’d determined that trying to match falling revenue with spending cuts would undermine a weakening economy. The weak growth we had through the first two thirds of 2013 justified that decision, but in Labor’s last budget and then in every Coalition budget, the return to surplus kept getting pushed back into the fifth year beyond Forward Estimates.
That’s what Scott Morrison did in the May budget, yet again, with the return to surplus now delayed until 2020-21. But Morrison also continued near-record levels of government spending despite the economy returning to near-trend growth. Joe Hockey had — like Swan before him — elected not to push a hard fiscal policy out of concern about weak growth. But Hockey had let spending balloon out above 26% of GDP, the level at which Kevin Rudd was spending in his response to the financial crisis. Morrison only reduced spending to 25.8% of GDP and committed to running a near-$40 billion deficit, even though growth had recovered. The debt and deficits and high spending continued to pile up under the Coalition, despite its claim to “have surpluses in its DNA”. And the government committed itself to massive long-term spending with its wasteful local procurement approach to naval ship building. Traditional forms of rural pork barrelling, like cheap loans to farmers, a $5 billion “Northern Australia Fund” and dams, reappeared in the budget papers.
Worse, this insouciant approach to spending by the Coalition was matched by a determination to hand out tax cuts to and preserve preferential tax treatment for its business mates. That cavalier approach to taxation started early, when Hockey and Arthur Sinodinos in late 2013 announced they were walking away from Labor’s superannuation tax changes, having already campaigned against Labor’s efforts to end the novated lease Fringe Benefit Tax rort. The government then moved to repeal the carbon price, to help big carbon pollution emitters such as coal-fired electricity generation companies, and the mining tax, to help mining multinationals; the 2015 budget saw more tax handouts to small business. These decisions cost the budget billions in revenue, even as the government insisted it was fixing a “budget emergency”. Its own tax measures proved much smaller in scale and aimed at the community, not business, such as the (welcome) restoration of fuel excise indexation. When Turnbull and Morrison took over, they mulled lifting the GST, but abandoned that in favour of accepting two of Labor’s ideas — increasing tobacco excise and reversing their opposition to curbing superannuation tax concessions, and briefly considered, but rejected, taking another one, on negative gearing.
Eventually, though, the old instinct reasserted itself, only this time on a grand scale: Turnbull and Morrison decided to hand out the biggest tax cut of all, $50 billion worth, to the Liberal Party’s big business constituency — many members of which already pay little or in some cases no tax.
Such policies might be a matter of partisan debate or media to-ing and fro-ing, but an independent, external body has now called them on it. Ratings agencies are by no means the font of all wisdom, as their performance in the lead-up to the financial crisis, but on sovereign ratings they are genuinely independent. “Remedial action” is needed, S&P says; it wants “more forceful fiscal policy decisions” from the government.
But even if, or when, S&P cuts the credit rating, it won’t have any discernible impact on borrowing costs in Australia, especially given the chances of the Reserve Bank adding another cut in the cash rate in coming months. That will soften the blow to home owners (but not credit card holders or small business), but it will increase the pressures on the revenue and earnings of our biggest banks — which are all now on negative watch as well. The big four banks are the drivers of the local stock market. If there is any sign of earnings pressure, especially looking out into 2017 and 2018, watch for the shares of those banks to add to falls already seen in 2016 of between 14% and 16% for the big four.
But pay attention to what is happening in global financial markets where fear and loathing is lurking just under the surface. Global bond yields have fallen sharply because of worries about eurozone banks (Italy especially), the very uncertain impact of Brexit on the UK and EU economies and financial systems, and fears that the already super low level of inflation could go lower as global economic growth slows even further. And that’s where the government will find itself pinned to the wall — if there is a global slow down, or a new financial crisis, then the Australian economy will need help from a more relaxed fiscal policy at a time when, to regain the AAA stable rating, or even the AAA itself, the government will be looking to cut spending.
In that case, we’ll be back to the situation that confronted Swan and Hockey, and ignoring the ratings agencies will be the right policy option because supporting demand and limiting the growth in unemployment will be the priority. The Coalition’s profligacy over the last two years could prove to be a serious missed opportunity.