The Less is More Budget
Scott Morrison’s maiden budget speech was the first since Peter Costello’s debut 20 years ago that did not include the word ‘surplus’ an unreported, but perhaps telling, fact. It is no secret that the 2016 Federal Budget made negligible progress on improving Australia’s bottom line. Projecting a small surplus way out in 2020/21 it has experts concerned about the future of Australia’s AAA credit rating. But, to its credit, this pre-election budget didn’t make things worse. Debt accumulation seems to be held and (retrospective super tinkering aside) policies are, for the most part, “harmless”.
So let’s talk motive for this seemingly benign budget. ‘Quintessentially political’ and a ‘bow to the altar of fairness’ is, of course, the popular view. Morrison claims it is all about the economic plan and, more specifically, Australia’s transition from the mining investment boom to a more diversified economy. This is a formula he hopes will restore credibility in terms of both the Coalition’s promises and their traditional strength of economic management.
True motive unknown, one thing is certain: the government wants this budget to appear calm on top while working hard underneath. The judgment here is less about ‘who’ the government has gone after and more about its modest proposals. And with the word ‘surplus’ conspicuous by its absence, perhaps debt is one of the driving forces behind this modesty.
A debt of global proportions
The world is staggering under a record amount of debt. Household, corporate and government debt are at unmatched levels in absolute and relative (to GDP) terms. According to a McKinsey Global Institute report on debt levels across 47 countries, it is estimated that global debt soared from US$142 trillion (A$187 trillion) in 2007 to US$199 trillion in 2014. Over these seven years, the ratio of debt to global output climbed from 269% of world GDP to 286%.
The report found that, over the past seven years, no major economies and only five emerging countries, (Argentina, Egypt, Israel, Romania and Saudi Arabia) have reduced relative debt. Concurrently, 14 countries boosted total debt by more than 50 percentage points. During this period, Australia’s total debt climbed 33 percentage points to 213% of GDP. The report also found that household debt has climbed to concerning levels in Australia (no surprise), Canada, Denmark, Malaysia, the Netherlands, South Korea, Sweden and Thailand. China has a special case of debt addiction all of its own. From 2007, Beijing instructed state banks to commence a lending frenzy that resulted in total debt jumping 82 percentage points to 217% of output (and more recent studies put it at 240% of GDP).It is no surprise that all this debt poses an unprecedented threat to the world economy and long-term financial stability. The probability that vast sums of the money will never be repaid (and will need to be written off) is high. Such an outcome could trigger systemic banking failures and, as the saga of Greece shows, without a global mechanism for dealing with sovereign default, any government bankruptcies will be messy.
But there is a flip side to debt. Borrowing is not a bad thing in itself and, in fact, debt is often referred to as the lifeblood of capitalism: the driving force that has lifted living standards for decades. At a micro level, debt enables people, companies and governments to manage cash flows over time. Sovereign debt, in most cases, provides investors with haven investments. Governments can safely borrow unceasingly if their fiscal deficits, as a percentage of GDP, are below the rate of economic growth. The problem is, there is no definitive point where debt can be categorised as ‘too high’ and hence ‘too risky’. It’s a balancing act and, at some point, the accumulation and risk have to be managed.
Is there a solution?Current policy makers are tasked with the desperate need to devise new solutions to dilute the threat from too much debt. This is particularly so since much of the collateral people and companies have borrowed against are assets priced at apparently unsustainably high values.
The difficult task for policy makers now is to curtail debt the “right way”. The worst action they could take would be to taint debt as “bad” and encourage excessive repayments. This would serve only to threaten the consumption and investment needed for a functioning economy. Take, for instance, the experience of the Eurozone: austerity measures shrunk economies faster than they reduced debt, entrenching deflation and boosting the real value of debt. The fact is most Governments, households and businesses can manage their debt loads, provided economies continue to hum. Which brings us back to Morrison and his Budget.
Whether it was intentional or not, there is an underlying pragmatism that should be acknowledged. The proposed measures are certainly in sync with a strategy that aims to keep an economy ‘humming’. Debt accumulation is stabilised, with no demands for a return to surplus (over the short-medium term) and is therefore, void of those pressures. Morrison does not want a nation of panicked people. Ask ordinary voters if they are better or worse off as a result of this budget, and the answer is likely to be “no change”. Gone are the messy policy thought bubbles such as a higher GST, cracking down on negative gearing excesses, or major income tax changes. Most of those “bubbles” have been comprehensively pricked. This is a budget that, on the surface, the government wants perceived as tough on its own base, not ordinary taxpayers. But at a deeper level, is possibly more economically calculating and strategic than many give it credit for.
Will it be enough to ensure the re-election of the Coalition for a second term? We will have to wait and see. Of course the opposition and some segments of the media have it destined to an unhappy fate, but despite their best efforts this budget seems to have achieved the rare feat of keeping the harmful blows at bay. Perhaps in doing less, Morrison may actually have achieved more.