The Australian government’s battle with a widening budget deficit is set to worsen over the next decade. At a minimum, it will put an end to any talks of budget surpluses indefinitely.
Few, if any, of us needed reminders about the rotten state of the budget. We know the government faces difficult challenges. The brave face the Coalition put on earlier in the year has worn off. And the brief optimism that followed the May budget has all but faded. The deficit situation is getting worse, and much faster than the government first
Fixing the budget
Just how the government plans on fixing the budget is anyone’s guess. And it doesn’t help matters when they make confusing statements removed from reality.
Take Treasurer Scott Morrison’s recent announcement as an example. He publicised that any new government spending would be ‘fully offset’. By what? Taxes?
Taxes seem like the likeliest option. Or so you’d think. When government has a revenue problem, tax hikes usually follow. Otherwise, the government risks falling further into debt.
But taxes aren’t the answer, if we take Morrison on his word. He believes restoring the budget to surplus won’t require higher taxes:
‘Such policies favoured by [Labor] will only serve to [slow] growth and the revenue that flows from a growing economy.’
Or so he says. Yet in an era of weak revenue growth, what alternative does Mr Morrison propose?
Taxes are the only way the government can fix its bottom line. The only realistic way, anyway. Any alternative is not only hopeful, but wholly unrealistic. If the government expects businesses to come to the rescue, they’ll be waiting a while. Business spending remains weak on the back of slack mining investment. And, while non-mining sectors are seeing growth, it’s not enough to offset mining cutbacks.
Maybe Mr Morrison is alluding to debt driven spending instead? That’s a likely answer as any. Budget experts predict national debt doubling over the next four years. Net debt currently sits at $250 billion, or 15% of GDP. By 2019, it’s expected to hit $400 billion. That would equate to roughly 20% of projected GDP.
If Morrison isn’t looking to taxes as a solution, then debt will have to do. What other option is there? There isn’t any. The government can deny it all it wants. But taxes will form a key plank of any future budget reduction plans.
In recent weeks, we’ve seen some of these proposed plans hit snags. The biggest story of late is a lack of statewide agreement on GST taxes.
It remains likely that, eventually, the GST will rise to 15%. That’d represent a 5% increase on the current rate. But it needs broad based state approval, which is proving easier said than done.
You can take your pick though. From GST hikes, to super taxes and other state levies, something will have to give.
Over the next five years, the effects of all this could leave GDP trailing lower than expected. In its May budget, the government estimated annual growth rates of 3.5% to 2019. But it’s clear the actual rate will likely fall closer in line with 3%. And even that’s not guaranteed. Until the economy weens itself off mining, it could find a home at 2.5% growth.
What does this mean? If nothing else, it’ll make any return to surplus difficult at best. As we head towards an election next year, the budget will cause a few sleepless nights for Mr Turnbull.
In truth, he’d be better off calling an early election. The longer he puts it off, the worse his deficit nightmare is likely to get.
Junior Analyst, Markets and Money
PS: Weak growth rates are likely to force the Reserve Bank to lower interest rates again in early 2016. Markets and Money’s Phillip J. Anderson says rates are likely to remain at record lows for a long time.
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