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Australia's growing debt a 'ticking time bomb', says TD Securities

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by August 30, 2016 General

Australia’s fiscal position is becoming increasingly untenable, even if current debt and deficit metrics remain low by global standards, TD Securities has warned in a strongly worded note to clients.

“The government is borrowing record amounts to consume, not invest – a ticking fiscal time bomb,” the investment firm’s chief Asia-Pacific macro strategist Annette Beacher said on Tuesday.

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TD Securities expects $100 billion of new bonds to be issued every year over the next three years at least, as the inability to fix the budget due to populist stonewalling sparks an “explosion” of government bonds.

Her warning comes a week after Treasurer Scott Morrison raised a scenario where no budget savings were passed in parliament, warning that if combined with a further deterioration in economic parameters the fallout would be a trillion dollar debt burden over the next decade. 

“As a trillion dollar debt amounts to around 56 per cent of GDP, goodbye AAA rating,” said Ms Beacher, who has been covering the Australian economy for a quarter of a century and has worked in Treasury. “This scenario sounds implausible, but actually has a non-zero risk given reform paralysis and still-volatile commodity prices.” 

Ms Beacher said global investors usually reacted with disbelief to warnings that Australia could be at risk of losing its AAA rating, noting there were few other developed countries with a fiscal deficit of just 2.5 per cent GDP and net debt of less than 20 per cent of GDP.

But she said it was the direction that these metrics had taken in recent years that was of concern. 

A particular worry for Ms Beacher is the structural jump in public expenditure and she blamed the former Abbott-Hockey government for missing an opportunity to rein in spending. 

"As a trillion dollar debt amounts to around 56 per cent of GDP, goodbye AAA rating," said Annette Beacher, who has been ... “As a trillion dollar debt amounts to around 56 per cent of GDP, goodbye AAA rating,” said Annette Beacher, who has been covering the Australian economy for a quarter of a century and has worked in Treasury. Photo: Peter Wells

“In the 2014-15 budget, the newly elected … government gave up on expenditure restraint and spending has been consistent with past recessions ever since,” the Singapore-based currency and interest rates specialist noted. “How would this play out if a recession actually occurred?”

Even more problematic for her, the GDP measure of government spending shows an overwhelming skew towards consumption in recent years, with investment spending all-but non-existent once GFC-inspired projects were completed.

The government is borrowing for consumption, not investment, TD Securities says. The government is borrowing for consumption, not investment, TD Securities says. 

“The government is only borrowing to consume,” she said.

Ms Beacher pointed to a recent warning by outgoing RBA chief Glenn Stevens who said:  “The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.”

Canberra's inability to fix the budget due to populist stonewalling will spark an 'explosion' of government debt, TD ... Canberra’s inability to fix the budget due to populist stonewalling will spark an ‘explosion’ of government debt, TD Securities warns. Photo: Jessica Shapiro

Ms Beacher also warned of complacency about Australia losing its coveted AAA rating, after Standard & Poor’s in early July put the government on notice by attaching a negative outlook to the rating.

“Losing the AAA rating may not be the market mover that it once was, but in the event of another global economic, financial or geopolitical shock, experience proves that for peripheral countries like Australia, it could find itself further down the queue when it comes down to attracting global capital without a AAA rating,” she said.

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