No News is Good News

When Treasurer Joe Hockey released the budget outcome for financial year 2012-13 a few weeks ago, he confirmed what all sober analysts know about Australia’s budget settings. Government finances are in robust shape. There is no dispute that they are worthy of the triple-A credit rating given from the three major ratings agencies, Moodys, Fitch and Standard & Poors. In 2012-13, the budget deficit was a trifling 1.2 percent of GDP with the level of net government debt equal to petty cash at 10.1 percent of GDP. There was a record cut in government spending in the year and tax receipts were a little higher, coming from a very low base as the economy registered a reasonable rate of growth. It was comforting news given the still acute sovereign debt problems dogging most of the world’s largest economies. The list of countries with a larger budget deficit and higher government debt than Australia is too long to mention. This highlights the grossly misleading discussion on government finances prior to the election where terms like “emergency”, “crisis” and “out of control spending” were frequently used to describe Australia’s budget position. The main offenders with these descriptions of the deficit were Mr Hockey and the Coalition leadership team. One may have concluded that on gaining office, they would want to quickly start the process of dealing with the budget crisis and emergency conditions. One month into the new government and there is no sign of any action from the Coalition government on fiscal policy. There is no talk of an economic statement before year end, which would be an opportunity for it to outline a few spending and tax changes that would address the problems, at least as the Coalition parties see them. Instead, there will be no changes in the budget finances for some time to come. In announcing the budget outcome last month, Mr Hockey even hinted that the Mid-Year Economic and Fiscal Outlook document, which in the past has been an opportunity for the government to make some fiscal policy changes as it updates the bottom line numbers of government finances, will not be released until January 2014. The level of new government borrowing has been robust, to say the least, since Mr Hockey assumed the role as Treasurer. Gross borrowing has been over $2 billion a week. Mr Hockey is in a position, if he sees fit, to direct the Australian Office of Financial Management to stop or reduce the government’s borrowing program. Of course this would need to be done in concert with budget moves to build a huge and immediate surplus because the AOFM needs to fund the budget deficit or else the government will run out of money with its “excessive spending” – as Mr Hockey used to like to say. Mr Hockey has not seen fit to slow down the pace of government borrowing, presumably because he is content with the steady increase in gross government debt. He knows that from a longer run, market stability perspective, Australia’s financial markets need a deep and liquid market for government debt. Indeed, it seems likely that rather than having an economic statement to deal with the budget issue, one of Mr Hockey’s first decisions as Treasurer will be to increase the government’s debt limit from the current $300 billion. There will be some irony in that decision, given he is doing little if anything to work against what in opposition he saw a reckless approach to the budget and government debt. The striking issue with all of this, of course, is that deep down, Mr Hockey and the Coalition know that the budget is in good shape. There is no emergency, no crisis and the current growth momentum in the economy will see the glide path to budget surplus confirmed in a year or two sustained. During the election campaign, when the Coalition released the rough costings of their promises, the path to budget surplus was the effectively the same as the Labor government, and the net savings outlined reduced net government debt by less than 0.1 percent of GDP. To the extent the Coalition sticks to its policy agenda outlined during the election campaign, its budget settings will be indistinguishable from those of the previous government. In the end, Australia has a particularly strong set of government financial accounts. This is the good news that will serve Australia well over the years to come, a point that Mr Hockey’s policy inaction clearly acknowledges. Stephen Koukoulas is Managing Director of Market Economics. marketeconomics.com.au Image courtesy of abc.net.au