Why Australia's AAA credit rating is doomed
The white flag has gone up at Parliament House.
When Treasurer Scott Morrison unveils his second Mid Year Economic and Fiscal Outlook this morning, replete with the now traditional Yuletide blow-out in deficit projections, it will be in the knowledge that the “coveted” AAA credit rating is doomed.
While the credit rating agencies could wait until the budget next May before issuing a downgrade, there seems little point in delaying the inevitable. There’s a strong chance that at least one, Standard & Poor’s, will move this week after putting the Government on notice a few months back.
Politically, it’s a treasurer’s worst nightmare.
From an economic viewpoint, however, it won’t make a great deal of difference. A downgrade simply would put us on the same level as the United States, the world’s biggest economy and effectively the global reserve currency.
No longer will we be able to stand tall alongside the likes of Lichtenstein, Luxembourg, Singapore and Sweden or the other six nations that now make up the “exclusive” AAA club.
The main effect will be on the cost of future borrowings. The Government will have to pay slightly more to borrow offshore, as will our banks and major corporations who use global debt markets. You can expect the banks to make maximum use of the publicity surrounding a downgrade to jack up rates in order to fatten their margins.
There will be no impact on existing debt.
So what’s all the fuss with credit ratings? Essentially, the less you borrow, the better your rating. If you have absolutely no debt, or next to none, you’re awarded a AAA. And that’s where we’ve been for more than a decade despite all the infantile accusations about a “debt and deficit disaster”.
Historically, our credit ratings have tracked our fortunes on commodity markets.
It may come as some surprise to learn that it was the Whitlam government that was first awarded the medallion in October 1974 by Moody’s, which was backed up by S&P the following June, just five months before the constitutional crisis and the government’s dismissal by governor-general John Kerr.
We were downgraded during the Hawke and Keating years and slowly upgraded during the Howard era as the most recent mining boom gathered pace.
It wasn’t until 2011, under Julia Gillard, that Australia achieved the top ranking from all three agencies.
Downgrade only a matter of time
Given the collapse in commodity prices in the past few years, during Joe Hockey’s time as Treasurer, it was only a matter of time before our ratings would come under pressure.
And that’s the point. It has been the waxing and waning of export-driven revenues that have had the biggest impact on our federal budgets, our deficits and our ratings for more than three decades — things way beyond the control of any government.
Despite what our politicians would have us believe, spending alone has not been the problem.
What is true is that we’ve ramped up spending and handed out tax concessions during the boom times which have left us exposed when the revenue bonanza has evaporated.
In a startling turnaround last week, the Treasurer finally dispensed with several decades of Coalition thinking when he admitted there was good debt, and bad debt. As your columnist has written here many times, borrowing to invest in infrastructure is good debt. Taking on debt to compensate for revenue shortfalls, to fund recurrent spending, is not.
It’s fashionable in some quarters to sheet all the blame for our budget woes on the Rudd and Gillard governments. But the signature projects, the NBN and even the controversial fiscal stimulus programs during the financial crisis — the schools construction and pink batts programs — essentially were infrastructure spends. They were one-off spends, not recurrent expenditure programs which, under the Treasurer’s new definition, is good debt.
When the Abbott government was elected, our national debt stood at $319 billion. Some time in the next few months, it will have crashed through the $500 billion mark, rising from 20 per cent of GDP in 2013 to a shade above 30 per cent.
Large slabs of revenue removed from the books
In addition to the collapse in commodity prices, Morrison has been saddled with the slowest wages growth on record. That’s kept bracket creep to a minimum. And its knocked all the revenue forecasts for six because, under normal circumstances, wage inflation pumps up income tax receipts.
It is not that he hasn’t tried to rein in spending.
In the May budget, the Treasurer took the bold step of trying to remove some of the inequities in the superannuation system, tax concessions or tax expenditures that essentially are middle and upper class welfare programs, that were introduced during the boom years.
According to Treasury modelling, these concessions cost the budget up to $25 billion a year in revenue. But the measures were rolled in his own party room, in a spectacular illustration of just how difficult it is for any treasurer to institute real taxation reform.
A big reason for the blowout in deficit and debt since the Coalition assumed power in 2013 is that it has consistently removed large slabs of revenue from the books.
It axed the carbon tax which was pulling in about $6 billion a year. It consigned the mining tax to the dustbin, although it held on to the oil and gas mining tax. (For some reason, it’s ok to tax hydrocarbons in oil and gas form but not coal. And iron ore? Forget it.)
Tony Abbott went to an election promising to rid the nation of both those taxes and duly delivered. But you don’t need an accounting degree to figure out that deliberately removing revenue ain’t gonna help you balance a budget.
The big promise from this year’s election was to cut the corporate tax rate. The hope is that it will spur economic growth down the track, which eventually will generate more income. Maybe it will. But in the short to medium term, it’s likely to shave even more revenue from the ledger.
That’s only going to make a Treasurer’s life more difficult and keep the ratings agencies on our back.