Federal Treasurer Scott Morrison said the word “debt” 30 times in his speech last week discussing the economic and fiscal outlook for Australia.
It was a dire warning on the future for the nation, the budget, and Australia’s fiscal future if the current settings are left as is.
That focus would be welcomed by Annette Beacher, TD Securities head of Asia-Pacific research, who wrote in a note on Tuesday that “Australia’s fiscal position is becoming increasingly untenable, even if current debt and deficit metrics remain low by global standards”.
She said that even though offshore investors usually utter “disbelief that any country with such low metrics could be at risk of losing its AAA rating” the trouble is there is a clear trend deterioration in these metrics over recent years.
That, and the dangerous reality that “the government is borrowing record amounts to consume, not invest [is] a ticking fiscal time bomb”.
Such is the way this new parliament is shaping up. Even as it just begins Beacher says the Australian government is likely to borrow at least “$A100b per year bond program for the next three years (at least) as reformist fiscal policy is stonewalled by populist politicians”.
Beacher says something must be done because the Australian government has little to no control over nominal GDP growth and national income which are heavily influenced by Australia’s terms of trade, themselves influenced by global forces.
The correlation between terms of trade and nominal GDP growth over the last twenty years is 91% she says. That renders any notion of the RBA targeting nominal GDP instead of inflation “misguided”, Beacher says.
But the real concern along with “persistent fiscal deficits is the structural break in government expenditure as a share of GDP” because the “Abbott-Hockey Liberal National government gave up on expenditure restraint (circle in chart above) and spending has been consistent with past recessions ever since”.
“How would this play out if a recession actually occurred?” Beacher asked.
This is a problem for Morrison who almost exclusively among his colleagues has continually tried to articulate a cogent reason, including strategies, for reining in Australia’s enduring fiscal issues.
But Beacher says:
The now one-seat majority of the LNP government in the Lower House, combined with an assorted array of ‘personalities’ in the Upper House (Senate) guarantees that passing any meaningful savings measures will be difficult. Whilst trimming expenditure is a priority for the government, the populist Senate is far more likely to reject savings measures, ruling them out as ‘unfair’.
It all means the federal treasurer warning that Australia’s debt position could blow out to a trillion dollars does not ring as hollow as such a headline grabbing statement sounds at first pass.