Fresh from exhorting Australians to “go out and spend,” Australian Treasurer Joe Hockey has unveiled a federal budget with a remarkably optimistic outlook on the economy. With the emphasis now on fiscal stimulus instead of cutbacks, the new theme was summarized by the Australian Financial Review’s Phillip Coorey: “Suddenly, everyone’s a Keynesian.”
After previously indicating that the national finances would be “appropriate for these times,” Hockey disappointed fiscal hard-liners by announcing Tuesday a projected budget deficit of A$35 billion for fiscal 2016, bettering market expectations of a A$40 billion deficit, but still amounting to 2.1 percent of gross domestic product (GDP).
The conservative Coalition government also postponed a promised budget surplus by another year, to fiscal 2020, based on projected GDP growth of 2.75 percent in fiscal 2016, rising to 3.25 percent the following year and 3.5 percent thereafter. For the world’s 12th-largest economy, the continuation of its 25-year winning streak would move it into record-breaking territory among advanced economies, should the forecasts prove accurate.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Citing challenges including terrorism, droughts, and the “largest fall in our terms of trade in half a century,” which had helped erase A$90 billion in forecast tax revenue, Hockey nevertheless outlined A$10 billion in new spending measures targeted at families and small businesses, along with A$5 billion worth of infrastructure for northern Australia.
Describing it as a “soft, cuddlier budget,” ANZ Research said the overall impact would be “fairly benign.”
“If the first principle of economic policy is ‘do no harm’, then this budget has hit the mark…With funding markets supportive and Australia’s net debt low, the government has left structural reforms for another day,” the Australian bank’s economists said.
However, should the economy fail to strengthen and commodity prices fall further, ANZ said government finances would remain stuck in the red at around 2 to 4 percent of GDP. Much of the improvement in the government’s fiscal position would rely upon greater tax revenues – a cyclical gain instead of structural repair.
Ratings Agencies ‘Smoking Dope’
Although credit ratings agencies Standard and Poor’s (S&P) and Moody’s both said their triple-A ratings for Australia were not immediately affected by the budget, other analysts were less confident.
The Australian Financial Review’s Christopher Joye said Australia “faces its biggest fiscal challenge in 60 years and does not deserve an AAA credit rating,” due to a near 20 percent GDP gap between government spending and income, and with a household debt-to-income ratio exceeding 150 percent.
“With fiscal and monetary policy all but completely spent, we have scant policy ammunition left to combat a real downturn. And the rating agencies are smoking dope if they think Australia is a better ‘credit’ today than it was in the 1980s and 1990s,” he warned.
In February, S&P said it could downgrade Australia’s credit outlook if gross public debt approached 30 percent of GDP, with the budget projecting a 27 percent ratio at its peak in fiscal 2017.
Nevertheless, financial markets showed a generally benign reaction Wednesday, with Australian stocks rising by 0.7 percent on expected rises in consumer spending, while the Australian dollar and 10-year bond yield were relatively steady.
After bemoaning a lack of “animal spirits” to drive investment, economists said the budget should not have the damaging impact to consumer confidence seen after Hockey’s previous budget in 2014.
“We would not expect the very negative reaction of consumers to this year’s budget,” National Australia Bank economist Alan Oster said in a research note. “That said, we would not really expect much of a kick to business confidence — outside of micro business.”
Amid speculation of a potential early election, Hockey’s budget also faces further revision from a hostile Senate. With about A$22 billion in budgetary measures from 2014 still subject to delays in the upper house, Shadow Treasurer Chris Bowen said the opposition Labor Party would oppose certain initiatives, including cuts to family payments, describing the budget as “cruel and twisted.”
Global Economy ‘Turning’
While Hockey played up Australia’s economic prospects on the back of a weak currency, record low interest rates and cheap oil, he also predicted further improvement in the global economy, describing it as “turning for the better.”
“The United States is back to near full employment, Europe is looking a little stronger, and Japan is finally starting to grow. And our biggest trading partner, China, continues to grow at nearly 7 percent, despite a recent slowdown,” he said.
According to the budget, China is expected to slow from 7.4 percent GDP growth in 2014 to 6.75 percent this year and 6.5 percent in 2016, although any speed bumps in its transition to consumption-driven growth could hit Australian exports.
The nation’s second-largest trading partner, Japan is seen steady at a 1 percent expansion this year and next, aided by accommodative fiscal and monetary policy, a weaker yen, and cheap oil. However, the government warned that over the medium to longer term, the success of Abenomics would be critical in addressing “structural challenges” in the world’s third-biggest economy.
In contrast, India is seen growing by 7.5 percent annually over the next three years, helped by economic reforms and lower energy costs. “If stronger growth is sustained, India could become a much more important trading partner for Australia and the region, which is why the government is prioritizing the negotiation of a Comprehensive Economic Cooperation Agreement with India,” it said.
Elsewhere in East Asia, Treasury predicted GDP growth rising from 4.1 percent in 2014 to 4.75 percent this year and next, aided by lower commodity prices and improved growth in their trading partners.
The government expects both the United States and Europe to pick up speed, with the world’s biggest economy posting an estimated 3.25 percent growth rate in 2015 and 2016, up from 2.4 percent in 2014. The Eurozone is expected to continue its recovery, increasing from 0.9 percent GDP growth last year to 1.75 percent this year and next.
Citing the benefits to Australia’s exports, Hockey said: “Each year we send enough iron ore to China to build the Sydney Harbor Bridge, from Sydney to Perth, and then back to Sydney again. And in the next five years we will become the world’s largest exporter of liquefied natural gas. Together with our annual exports of coal, this is enough energy to power Tokyo, Singapore and Mumbai for an entire year.”
“People ask me where are the future jobs going to come from…if we could lift our service exports like higher education, tourism, health care and financial services, to just half the level of our commodity exports, it would add A$50 billion to our economy each and every year,” he added.
Hockey concluded his budget speech by saying, “Despite the iron ore price having halved, we are still on a clear and credible path back to surplus.”
In the meantime though, Australia, like other advanced nations has returned to so-called Keynesian pump priming to shore up an economy still suffering a post-mining boom hangover. For Hockey and his government, making Aussies open their wallets again could prove crucial in ensuring the “Lucky Country” stays lucky enough to avoid more painful medicine.