The Australian government faced a stark warning last week that unless it reigns in the finances it’s at risk of losing it AAA rating from ratings agency Standard and Poor’s.
Although there is no immediate threat of a downgrade from the AAA rating the ratings agency told the Wall Street Journal that the government needs to cut down on spending to balance the budgets.
In an interview, S&P’s sovereign analyst Craig Michaels predicts that government debt will balloon out to 20 per cent of gross domestic in the next few years.
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Also stepping into the argument was Parliamentary Budget Officer Phil Bowen who gave evidence before a Senate estimates hearing on medium and long-term risks for the Australian economy.
He said the government needs to act and bring finances under control.
“The requirement for fiscal consolidation certainly exists,” Mr Bowen said.
“This is not a situation we can continue to live with over the longer term.
“Increasing debt risks crowding out private sector investment and negatively impacting economic growth.”
Stephen Walters an analysts from JP Morgan noted that Australia has been caught off guard by the end of the mining boom with the rest of the economy failing to pick up the slack,
“We knew for some time a plunge of mining investment in Australia was fast approaching,” said Mr Walters. “The economy now is sliding down the precipice pretty much at the pace expected, as the sector moves from expansion to production.”
“The spending slide in mining swamps any capex boost outside resources,” he said.
Mr Walters layed out the points below as a cause for lack of investment
- “Persistently low and fragile business sentiment’, as reflected in the National Australian Bank and Australian Chamber of Commerce and Industry business surveys;
- Recent setbacks for public investment. These included the recent dismissal of Queensland’s conservative state government, which had promised infrastructure spending funded by public asset sales. The Federal Government’s plans to subsidise state government infrastructure spending may also be in peril, the research note warned. Infrastructure is “creaking under the strain of rapid population growth,” the paper warned;
- High business costs;
- “Chronic reform inertia”, with the 2000 tax reforms – which introduced the GST – the last major enduring change. “Attempts at addressing climate change, further tax reform, asset sales to boost public infrastructure, and liberalising the industrial relations landscape either failed, or legislated measures were reversed by later governments”.
- Rigid labour markets. “Australia now has, on key measures, more rigid labour markets than many competitors and punishingly high penalty rates.” Also, “Australia’s minimum wage is double that in the US”.
- Average wage earnings that in 2013 were 70 per cent above the global mean, although the recent depreciation of the Australian dollar had reduced that;
He also noted that Political instability will play a role and will make reforms “more difficult than ever”, as will the expected growth in the unemployment rate, pressuring the Australian dollar and leaving the RBA no option but to cut rates again in May or even earlier,
“This will force the Reserve Bank to try and mask the economy’s structural impediments with more policy easing, which at least could drive down the Australian dollar.
“We forecast another rate cut in May, with the risk of an earlier move, if conditions worsen more quickly.”