Bride to bridesmaid, it's Australia's financial lot
Australia was supposed to be one of the fiscal darlings of the developed world. The nation's debt was among the lowest of its peers and the budget was due to come back into surplus before the year was out.
Now we are contemplating tax rises, an increasing debt burden and little prospect of a surplus until at least 2017-18.
Indeed, at Deutsche Bank we expect a deficit this year of $14 billion, increasing to $23 billion in 2014-15. Net debt at the federal government level will peak at about $280 billion in 2016-17.
So what happened, does it matter, and what should we do about it?
The persistence of budget deficits suggests that the federal budget is in a structurally weak position and too heavily dependent on high commodity prices.
Just how dependent becomes apparent when comparing today's position against the structural budget balance back to the 1960s, showing how it would look if commodity prices were at lower, more normal levels.
On our estimates the structural deficit will be about 2.25 per cent of gross domestic product (GDP) in 2012-13, and still at that level come 2016-17. Indeed, over the coming years we see the structural deficit averaging more than at any time under either the Whitlam or Fraser governments.
So the fall in commodity prices and the slowdown in nominal GDP growth over the past year aren't the cause of Canberra's budget woes. Rather, they are a symptom of a structurally weak budget position that is the legacy of almost a decade of complacency.
The tax cuts in the early years of the commodities boom, the super-optimistic revenue forecasts in the past few budgets, and the view that revenue would
simply lift back to levels prevailing
before the global financial crisis have all
played a role.
So have forecasts of mining tax and carbon tax revenues wide of the mark.
For comparison, look no further than Canada and New Zealand, which are likely to return to surplus ahead of Australia, despite revenue as a share of GDP remaining well below its peak from before the global financial crisis.
There are several risks that stem from Australia's fiscal weakness.
The first is that deploying a fiscal stimulus of the size seen during the GFC is no longer an option available to Australian policymakers.
Second, with the budget set to be in deficit over any reasonable definition of the medium term, the federal government is now contributing to the current-account deficit. That ends an almost 20-year fiscal strategy under the watches of Howard, Costello, Rudd, Gillard and Swan of ensuring that fiscal policy makes no call on national savings.
As for a way forward, Australia has to embark on a process of genuine fiscal tightening - something not seen since the 1996-97 budget.
Limiting savings measures to simply matching new spending and waiting (or hoping) for revenue to recover is no longer a prudent approach. Doing so will see the structural deficit stuck at $50 billion or so for years to come.
Some will argue that tightening fiscal policy at this point is inappropriate, holding the economy back at a time when growth may be faltering.
It seems there is never a good time to tighten fiscal policy. But implementing tightening on the scale of 1996-97 would lead to a broadly balanced budget come 2015-16 and a modest surplus of 0.6 per cent of GDP in 2016-17. The structural budget position would return to balance in 2018-19 as the bedrock of a robust economy.
Far from being mindless austerity, this would be mindful prudence.
Frequently Asked Questions about this Article…
The article says Australia’s budget is structurally weak and too reliant on high commodity prices. Factors include tax cuts made during the commodities boom, over-optimistic revenue forecasts in recent budgets, and forecast mining- and carbon-tax revenues missing the mark. The recent fall in commodity prices and slower nominal GDP growth are treated as symptoms of this structural weakness rather than the root cause.
According to the Deutsche Bank estimates cited, the federal budget was expected to run a deficit of about $14 billion in the year discussed, increasing to $23 billion in 2014–15, with net federal government debt peaking at roughly $280 billion in 2016–17.
The article explains the structural deficit as the budget shortfall after removing cyclical factors like temporary commodity booms. On the article’s estimates, the structural deficit was around 2.25% of GDP in 2012–13 and remained about that level through 2016–17, averaging more than at any time under the Whitlam or Fraser governments.
Falling commodity prices reduce resource-related revenues and expose how dependent the budget has become on those revenues. The article frames the recent price falls as a symptom of a structurally weak budget, meaning lower commodity prices make it harder for the government to meet revenue expectations and can prolong deficits—an important consideration for investors watching fiscal policy and economic strength.
The article highlights several risks: reduced ability for the government to deploy a large fiscal stimulus like during the GFC, the federal government contributing to the current-account deficit (ending a long period of fiscal policy not calling on national savings), and diminished fiscal flexibility overall. These risks can affect macro stability and policy responses available in a downturn.
The article says Australia’s weaker fiscal position and higher debt mean policymakers no longer have the capacity to deploy a stimulus on the scale seen during the GFC. With ongoing deficits and rising net debt, the government has less room to borrow for big stimulus programs without worsening fiscal sustainability.
The author argues for genuine fiscal tightening—more than merely matching savings to new spending or waiting for revenues to recover. Implementing tightening on the scale of the 1996–97 budget is presented as the way to achieve a broadly balanced budget and eventually return the structural position to balance, described as mindful prudence rather than mindless austerity.
The article gives two scenarios: without significant tightening, there was little prospect of a surplus until at least 2017–18 and the structural deficit could persist. In contrast, if Australia implemented fiscal tightening on the scale of 1996–97, the budget could be broadly balanced in 2015–16, produce a modest surplus of about 0.6% of GDP in 2016–17, and see the structural budget position return to balance by 2018–19.
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