Australia’s conservative Government, led by Prime Minister Malcolm Turnbull, has delivered its second budget, and putting aside the rank domestic political debates about winners and losers, the nation’s premier financial announcement is pitched squarely at the debt rating agencies and the political pollsters.
Aside from the numbers, the Treasurer, Scott Morrison, made it clear to those who rate Australia’s debt that the 2017-2018 budget is “about making the right choices and we must choose to ensure the Government lives within its means.”
To that end, the Treasurer has reaffirmed his forecast of last year for a return to budget surplus in 2020-2021 when the nation’s accounts should be in the black to the tune of $7.4 Billion (AUD), compared to this financial year’s budget deficit of $37.6 billion. He hopes that forecast GDP growth of 2.75% this financial year and 3% for each of the three following years, spending growth constrained to less than 2% a year over the forward estimates and inflation of between 2% and 2.5%, will be enough to reassure the ratings agencies there is a credible path back to surplus.
The credibility of that path will be watched keenly especially given the forecasts rely heavily, as they always do in Australia, on commodity prices. The Treasurer has been conservative in his forecasts but the level of vulnerability is demonstrated in iron ore prices. If they don’t hold at $US55 a tonne until 2018, GDP could be more than $AUD3 billion lower in the current financial year alone.
The last time Australia’s national accounts were in surplus was a decade ago despite previously unrealised forecasts of a return to surplus. Add in the fact that Commonwealth net debt has grown from virtually zero in 2007 to a forecast peak of $375 billion(AUD) in 2018-2019, the ratings agencies have become increasingly wary of Government forecasts and its ability to deliver.
In simple terms the Government is taxing its way to a forecast surplus after abandoning around $13 billion in spending cuts that Australia’s Senate, dominated by independents and third parties, has been refusing to pass since 2014.
The big tax grab comes primarily from bracket creep whereby inflation adjusted wages put more and more working Australians into higher tax brackets ($8 billion), an increase in the levy imposed on all Australians for universal healthcare ($8.2 billion) and the introduction of a levy on Australia’s five biggest banks ($6.2 Billion).
This last measure is pure retail politics that will play well with voters and one which the Government hopes will positively impact the polls. Bank bashing and demonising multi-national corporations over how they arrange their tax affairs has become a national sport in Australia to the point where there are serious questions being asked about sovereign risk and international perceptions about Australia as a stable investment destination.
However the Government is playing into an increasing fervour of nationalism which is not dissimilar to what has been witnessed in the United Kingdom via Brexit and the United States with the election of Donald Trump and the rejection of the mainstream parties in the recent French Presidential election.
After years of missed spending and revenue forecasts, rising debt and concerns about structural deficits, the Turnbull Government like its recent predecessors continues to walk a tightrope over debt ratings. If the forecasts are missed Australia’s much prized Triple A credit rating would almost certainly disappear.
Australia has only once lost its AAA rating and that was 30 years ago under a left of centre Government. The political storm that would erupt if a rating downgrade occurred under a centre right Government, traditionally considered strong economic managers, would be almost impossible for the Prime Minister to weather, given he has a 1 seat majority in the House of Representatives and is in minority in the Senate.
The first indication of whether the Government might live or die as a result of this budget will be the Mid-Year Economic and Fiscal Outlook, which must be released in six months.
Steve Murphy is a Senior Advisor in the Strategic Communications segment of FTI Consulting and based in Melbourne, Australia.
About Our Team
The Strategic Communications Australia team at FTI Consulting can provide public affairs counsel to help navigate complex regulatory issues as well as future political or legislative changes, stakeholder engagement strategies, industry positioning advice, unique and early insights on regulatory issues through our global network, and connections to local experts in foreign jurisdictions to provide first-hand knowledge around upcoming issues.