Forecasting is fraught with danger, particularly when you’re talking about a budget as complex as that for the Australian government.
Take projecting net government debt levels as a prime example.
Continuing the well worn path of prior budgets, the government now sees net debt as a percentage of GDP peaking at 19.2% of GDP in 2017/18, equating to a dollar figure of $346.8 billion.
Net debt is equal to the sum of deposits held, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements, according to the government’s website.
Whether measured as a percentage of GDP or in dollar terms, it was both higher and later than what was forecast in the prior budget.
Equally as consistent as the upward revisions was the projection that net debt as a percentage of GDP would then start to decrease, and fast, falling to just 9.1% by 2026/27.
Phew! Happy days, right?
While it would be nice to say that the projections will come to fruition, this excellent chart from CBA’s fixed income strategy team, headed by Adam Donaldson, doesn’t provide much confidence that the trajectory is going to suddenly reverse.
It shows the 2016/17 budgets forecasts for net debt as a percentage of GDP, comparing what was offered overnight to those projections of other budgets going back to 2010/11.
The chart is telling.
Time and again, the percentage is revised higher as does the year that net government debt will reach its peak, yet we’re told that things will start to improve, only at a later date.
To the CBA, along with doing very little to boost credibility in the projections, this trend of overpromising and under delivering will have ramifications for Australia’s sovereign credit rating should it continue.
“Despite no change in tack from the agencies, Australia is consistently forecasting a peak in net debt and failing to deliver on the forecast,” says the bank. “The slow decline in Australia’s credit quality will, if unchecked, lead to a downgrade. Australia’s AAA sovereign rating rests on S&P’s goodwill and belief that Budget forecasts will be met.”
While S&P took no ratings action on Australia’s sovereign credit rating in the immediate aftermath of the budgets release, leaving it at AAA with a steady outlook, CBA warns that could change, and sooner than what many expect.
“We’re clearly at the point where warnings may start to become louder, and a negative outlook can’t be ruled out,” they note.
“The Government has today done a good job in demonstrating fiscal commitment considering the impending election. But July 2 is some way off and S&P will no doubt be tallying up spending promises over that period.”