Government debt is at a record high

Thu, 27 Sep 2018  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/government-debt-record-high-heres-good-news-013049695.html 

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Government debt is at a record high

In May 2014, then Treasurer Joe Hockey announced that the budget deficit for 2017-18 would narrow to just $2.8 billion. The projections in that budget indicated a return to surplus in 2018-19.

Fast forward a little over four years and Treasurer Josh Frydenberg and Finance Minster Mathias Cormann confirmed that the budget deficit for 2017-18 came in at $10.1 billion, nearly four times the estimate presented in the first Coalition government budget. Progress on repairing the budget has clearly been slow and marginal under the Abbott-Turnbull-Morrison governments, despite some of the strongest global economic conditions in a decade.
Policy actions of the Coalition over the five years it has been in office have actually damaged the budget balance with a raft of extra spending, and the quest for a return to surplus has been driven by a strong global economy, not local policy changes.

While the budget deficit was the smallest in a decade, the narrower deficit was based on unexpected riches flowing from surprisingly buoyant prices for iron ore and coal which have seen tax collection rise to levels also not seen in a decade.

This is not to sniff at the good fortune of the current government. It is always great news when the prices of our main commodity exports are strong. It adds to Australia’s national income, adds to government tax revenue and should always been welcome.

But it is important to realise it is simple luck rather than good economic management.

Prime Minister Morrison welcomed the budget numbers. He also suggests that a vote for Labor at the next election will be a vote for higher taxes. It is an odd claim, which according to his government’s own budget papers is based on perception, not facts.

The 2017-18 budget numbers confirm that the tax to GDP ratio jumped to 22.7 per cent of GDP, a level of tax that is higher than in every year of the previous Labor administration.

The tax take was around 1.5 percentage points higher than the average annual tax take of the previous Labor government. In today’s dollar terms, the tax take in 2017-18 is around $30 billion higher per annum than under Labor. That is a lot of extra tax we are all paying.

Which begs the question, which is the party of high taxes?

The picture on net government debt is more disconcerting.

The level of net debt hit 18.6 per cent of GDP which is the highest since the last 1950s and a time when the government was dealing with the debt build up that occurred in from the cost of fighting World War 2. By way of a further comparison, the level of net debt was just 10.4 per cent of GDP in 2012-13, the time the Coalition won the 2013 election. Suffice to say, the path of budget repair tracking more slowly than the Coalition promised when it took office 5 years ago.

It is still expecting a return to surplus next year or two, aided by the continuation of unexpectedly high iron ore and coal prices. The return to budget surplus also relies on extra tax revenue flowing from an acceleration wages growth and GDP continuing to grow at a 3 per cent plus pace. Many economists remain concerned that the commodity price level is vulnerable to a dip as the Chinese economy slow and global supply continues to rise. There is also a serious question about the wage pick up Treasury is hoping to see.

If there is any downside to these critical aspects of the budget numbering, the move to surplus will be delayed another year or two and with that, government debt will still rise.

Let’s hope commodity prices remain high and wages growth does eventually pick up and by this time next year, a strong economy has seen a long awaited return to a budget surplus.

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This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-policy-failure-stephen-koukoulas-2018-10 

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The RBA is failing on the most basic measures and it’s time it was held to account

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The bond market is crashing - and it'll affect you

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This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/bond-market-crashing-itll-affect-232320713.html 

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The bond market is crashing - and it'll affect you

There are two very important trends unfolding in financial markets.

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To the bond market first.

In the US, bond yields – or interest rates – have jumped sharply since Donald Trump was elected President and he took the decision to lock in trillions of dollars of government borrowings to fund a range of tax cuts. When Trump was elected, the 10 year bond yield in the US was around 1.9 per cent, with the 2 year yield around 1.0 per cent. Now, with the US budget being trashed and inflation pressures building, those yields have jumped to around 3.2 and 2.9 per cent, respectively.

Part of this surge in yields is linked to the US Federal Reserve hiking interest rates in reaction to the extreme sugar hit to the economy from the extraordinary fiscal policy easing. It is also engaging in quantitative tightening, which is unwinding the money printing that was instigated in the wake of the banking crisis.

The other part of the jump in US yields is linked to expectations of an inflation surge as the economy is flooded with borrowed government money.