One of the most frustrating aspects of the last 20 years for me has been the ridiculous political love affair with Australia and many states desire to maintain the AAA rating. For too long this cult of Triple A has been used by governments of all stripes as an excuse to neither borrow nor invest. That’s left Australia, our States and our cities devoid of the type of infrastructure that the growing nation needed and the mining boom could have provided.
So it is both refreshing and almost earth-shattering that Morgan Stanley Australia released a report overnight saying its time for Australia to launch a massive infrastructure spend in order to keep the economic transition on track.
The report says “Australia’s transition from resources-led growth to an East Coast Recovery” is at risk of stalling because monetary policy “is taking too much of the load, swelling the risk in the housing cycle”.
But the authors, Daniel Blake, Chirsi Nicol, Antony Conte and Steven Ye, say that “(in) contrast to popular belief, fiscal policy has scope to build a link between the current housing boom and broader growth, but the current narrative suggests a continued focus on the politics of surplus rather than the necessity of targeted spending.”
Changing the narrative changes the game and the report says that by Morgan Stanley estimates “Australia has scope to launch an infrastructure stimulus of A$80bn (5% of GDP), whilst likely retaining its AAA-rating, with government debt peaking under 30% of GDP.”
In proposing such a spend the authors note the difficulty of managing Federal-State relationships and the time lag before the first sod of dirt is turned but highlight that “the projected A$80bn spending would boost non-mining business sentiment and accompanying investment.”
That’s exactly what Australia needs – building for the future.
Even though the proposal advocates spending to a level of government debt below the credit rating agency’s 30% line in the sand, the report senses the beating of the drums from the AAA crowd. There is “too much focus on AAA” and the report questions “whether the unwritten ‘AAA fiscal rule’ is right for the challenges ahead”.
They note something that those in financial markets, as opposed to politics or the commentariat, know all to well “history shows that the market has generally shrugged off peers’ downgrades.”
Indeed it does – just ask Japan.