Tag Archives: budget surplus

Australian Government Will Never Get Out Of Debt

23 Apr

You may recall the days of late 2009, and early 2010.

Barnaby Joyce had been appointed Opposition Finance spokesman. He was taking flak from all sides over his public warnings regarding Australia’s rapidly rising government debt trajectory. Ever the “little ‘ol country accountant”, Barnaby had quickly calculated the basic numbers:

Let’s talk about the abundance of faith exhibited by Labor when it tells us of the eight consecutive $19bn surpluses that are required to bring the budget back into orbit when the continued stresses on the international economy are clear and evident, especially in Europe.

Within the first two days of launching this blog in February 2010, I stated that “No, We Cannot Pay Our Debt”:

Surplus-Deficit

This country has never seen anything like eight consecutive years of $19 Billion surpluses. In fact, the Howard Government achieved it just 3 times… in 12 years… during an unprecedented mining boom.

A day later I posed the question, “Can We Even Pay The Interest?”

Interest_Surplus_Comparison

Click to enlarge

As you can see, Ken Henry’s projected Interest on debt alone is greater than many of the 12 years of Howard Government surpluses. And they came during an unprecedented mining boom…

Paying back the projected Interest-only will obviously be a big challenge. So try to imagine how we are ever going to pay back the principal too…

It is easy to see why Barnaby is so concerned about our ever-rising debt under Rudd Labor.

Because quite simply, we can not pay it back.

Since the days of February 2010, Barnaby has been demoted, and the trajectory of ALP’s borrow-and-spend-a-thon has streaked ever higher – see the masthead of this site.

Those Interest-on-debt projections have, of course, continued to extend further and further into the future:

Screen shot 2013-04-22 at 6.35.12 PM

Budget 2012-13, MYEFO, Appendix B, Note 10

Yesterday came the news that not only is there not going to be a return to budget surplus this year – quelle surprise! – but that an “expert” think-tank (ie, lobby group for vested interests) is now predicting a further decade of budget deficits:

Structural changes in the economy are likely to leave Governments across Australia facing budget deficits of around 4% of GDP for at least the next decade, according to research released today.

The Grattan Institute paper, Budget Pressures on Australian Governments, suggests it could be a long time before Australian governments post a collective surplus.

Fairfax papers reported (note the $40 billion error in the opening line; contrast the final paragraph):

Australia faces a decade of budget deficits with the annual total set to pass $60 billion in 2023 unless governments take tough action to “share the pain”, an expert panel has warned.

The Grattan Institute’s assessment comes as Treasurer Wayne Swan confirms the budget has taken a $7.5 billion hit since the midyear update in October…

The institute says that while notionally on track to surplus now, the combined state and federal budget deficits should reach 4 per cent of gross domestic product by 2023, which is about $60 billion in today’s dollars and would be about $100 billion in 10 years’ time.

I fear this estimate may well err to the conservative. A $100 billion combined budget deficit in 2023? No problem … Fed Labor achieved $55 billion in 2009-10:

Source: Catallaxy Files

Source: Catallaxy Files

One can only imagine just how big the TOTAL of Australian government debt – and the Interest bill – will be if the Grattan Institute’s prediction for another decade of annual budget deficits is realised.

Meanwhile, over the weekend the Australian Financial Review reported that the Liberal Party has backed away from its own commitments to achieving a budget surplus (h/t MacroBusiness):

Opposition Leader Tony Abbott has declared “all bets are off” on whether the Coalition will deliver a surplus in what could be its first year in office, prompting warnings from a prominent economist that the budget may not be balanced for years…

Asked at a public meeting in Melbourne when the Coalition would deliver its surplus, Mr Abbott said he had previously been confident about the timing based on government figures as they stood just before Christmas. He indicated he had changed position because the government wouldn’t reveal the budget’s true state.

And fair enough too.

Clearly though, none of the “expert” economists, commentators, and certainly none of our politicians – with the exception of Barnaby Joyce – will take any notice of this paragraph in the Grattan Institute’s report (emphasis added):

Balanced budgets over the economic cycle make a big difference. Persistent large government deficits incur interest costs. They lead to large government debt that can limit future borrowings. Some argue that high debt reduces economic growth. On any view, persistent large deficits can unfairly shift costs between generations, and reduce flexibility in a crisis.

As many developed countries have rediscovered in recent years, high government debt coupled with low economic growth creates a terrible economic dilemma. If government increases spending, the debt gets worse, markets charge higher interest rates, and borrowing more becomes impossible. If government tries to reduce its deficit, GDP slows further, and government debt can rise as a proportion of GDP, making the problems worse. Their successors and financial institutions can then find it difficult to borrow at reasonable costs, and economic growth is often slow for a long time.

How to respond to the trap of low growth and high government debt remains contentious. Far better to avoid the trap in the first place – which means running balanced budgets over the economic cycle.

Although the true state of the budget may be unclear, as the months and years pass by, there is one thing that becomes ever more clear.

Everyone should have heeded the warnings of our “little ol’ bush accountant”, the sacked Opposition Finance spokesman.

Barnaby was right:

“If you do not manage debt, debt manages you.”

– February 2010

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Boom State Busts

29 Dec

The WA government has revised its 2011-12 budget forecast downwards … by more than 50%:

The West Australian government has slashed its projected surplus by more than $200 million because of risks in the global economy, weaker royalties, a weak housing market and the high Australian dollar.

WA is expected to record a $209 million surplus, making it the nation’s highest surplus for 2011-12.

But the projected surplus is significantly lower than the $442 million forecast at budget time.

The figure was released on Wednesday as part of the Liberal-National government’s mid-year review.

Reasons given?

Treasurer Christian Porter said there had been many changes to the global economy since the May state budget.

“There’s been one single unanticipated economic phenomena that has occurred since the time of delivering the budget in May, which has had a very significant impact on the WA state economy – that is the events that are unfolding in Europe.

“It is self-evident that what’s going on in Europe is very serious.”

Mr Porter said the European sovereign debt crisis and a slower than expected recovery in the US economy had been major factors in the revised estimates.

He said the royalty revenue had been revised downwards to $970 million over the budget and forward estimates period because of a higher $US/$A exchange rate and the impact of lower iron ore, oil and base metals prices.

Mr Porter said that while the European Union accounted for just six per cent of WA’s merchandise exports, it provided 20 per cent of China’s exports, which could affect WA.

He said that if conditions in Europe worsened and negatively affected the availability and cost of credit, major resource projects in WA could be delayed.

Anything else?

… the housing market remains weak with both house prices and sales volumes lower than the budget forecasts.

And the future beyond the next 6 months?

Budget surpluses are still forecast until 2013/14 though these too have been revised significantly downwards.

Why?

Softening iron ore prices over the last six months have hit the State Government’s revenue projections hard, with Treasurer Christian Porter forecasting an almost billion dollar drop in mining royalties in the state over the next four years.

Speaking to reporters today Mr Porter said the government has slashed $951 million from its projections of mining royalties, with almost $820 million coming off iron ore royalties alone over the next four years.

This is despite the State Government increasing royalty rates on fines iron ore from 5.25 per cent to 6.5 per cent from July next year, and up to 7.5 per cent from the following financial year.

The State Government’s mid year financial review forecast a steady fall in iron ore prices over the next four years, however, following sharp falls in spot prices earlier this year as uncertainty over European debt and the health of the Chinese economy hit markets.

So, our “boom” state is now expecting a bust.

Of 50%+.

What was it that Senator Joyce said in response to the Federal government’s “truly extraordinary” May budget forecast?

Opposition frontbencher Barnaby Joyce has taken a swipe at the Gillard government’s approach to the economy, saying it had an unbounded belief in Asia’s demand for Australia’s resources.

“God help you when the prices go down,” he told reporters in Canberra on Wednesday.

The government’s approach to economics was “a clever ability to charge people to dig up red and black rocks.”

“They (government) have an unbounded belief that the people in South-East Asia will have an eternal gratitude to pay an excessive price for red rocks and black rocks.”

And what did he say in September (a must-read)?

Australia avoided recession because of the export of red rocks (called iron ore) and black rocks (called coal) in record volumes at record prices, record shipments of wheat, a 425 basis point drop in interest rates and a comparatively low dollar.

Wayne Swan likes to regularly point to Australia’s $400 billion investment pipeline but he doesn’t control that. That is a promise of someone else’s benevolence. What he does control is the public sector debt and it is going through the roof.

Barnaby was right.

Again.

Now, about that revised fudged $1.5bn Federal government budget surplus, forecast for 18 months away.

Wayne? … Wayne?!?!

Oh, of course. Silly me. We don’t need to hear it again.

We all know the mantra by now:

“Our economy has blah blah strong fundamentals blah blah low debt blah blah trend growth blah blah a huge investment pipeline.”

Missing The Key Economic Point, For Dummies

30 Nov

It is rather bemusing to browse around the economic commentaries on Wayne’s MYEFO (Mid Year Economic and Fiscal Outlook) announced yesterday. In particular, the commentaries from those with a leftist bent.

By and large, from these folk we hear the same refrain as that parrotted on down the line from Treasury via their talking head (Wayne Swan). To wit, “strongest economy in the developed world”, “envy of the developed world”, “lower debt-to-GDP than other advanced economies”, “nothing to see here, move along folks”.

Here’s some good examples that caught my eye:

Secondly, let’s tackle the Opposition canard – gleefully recycled by some media outlets – that somehow we are drowning in debt. It doesn’t take much – like five minutes on the Internet – to show that total government liabilities at around around 22 per cent of GDP are the lowest in the OECD and compare extremely favourably to just about every other developed economy.

It appears rather obvious from The Failed Estate’s analysis, that he did indeed spend “like 5 minutes on the internet” researching his momentous piece of groupthink.

And then there was New Matilda’s Ben Eltham. See if you can spot the drive-a-truck-through-it hole in his effusion (hint, emphasis added):

Step back from all the sound and fury about budget surpluses and the European debt crisis for a moment, and have an unbiased look at the latest Treasury figures on the health of Australia’s economy.

Unemployment is expected to peak at 5.5 per cent next year, and remain at the level into 2013. Inflation will be 3.25 per cent. Wages will grow at 4 per cent. Consumer spending will grow at 3 per cent, and the economy as a whole at 3.25 per cent.

These are figures that would make finance ministers in Europe weep. The Australian economy is growing. We’re adding jobs and keeping unemployment low, consumers are still spending, and inflation is modest. And yes, the budget will return to surplus.

Note to Mr Eltham: These are “estimates” and “projections”. Not outcomes. “Expected” does not equal “will”.

Indeed, as regular readers know, both the budget and MYEFO are all about “estimates” and “projections”.  And the Treasury department has a sterling record of abject failure when it comes to getting within a bulls roar of accurately predicting the final budget outcomes. Indeed, in less than 6 months, their “truly extraordinary” growth forecasts underpinning the May 2011 budget “estimates” and “projections”, are already shot to hell.

But our purpose today, dear reader, is not to dissect the ignorant parrotry of “leftist” journalists and bloggers.

Or “rightists”, for that matter.

Our purpose is to identify the key economic point that they are all missing.

One that even respected mainstream economic commentators like Access Economics’ Chris Richardson, here implying that it may not be wise for the government to be cutting spending at this time, have universally overlooked:

Deloitte Access Economics director Chris Richardson said the government planned to cut spending when the Reserve Bank of Australia (RBA) had cut its cash rate in early November.

The RBA cut the cash rate from 4.75 per cent to 4.5 per cent to provide some stimulus for a slowing economy.

“What the government is doing here is actually taking money back out again solely to get a surplus next year,” Mr Richardson told ABC Radio on Tuesday.

“It is not clear that it is smart to have the Reserve Bank tipping money but the government then taking it back out when the outlook especially with Europe is somewhat fraught.”

Let’s help out Messr’s Denmore, Eltham, and Richardson, with a brief guide on how to miss the key economic point.

For dummies:

1. Focus on the Federal government public debt figure.

2. Emphasise comparison of Federal government public debt-to-GDP versus other “developed” countries, praise Labor government for comparatively “low debt-to-GDP”.

3. Downplay importance of return to balanced annual budget / budget surplus. Cite 2. as primary justification.

4. Belittle any who express concern over ever rising government debt trajectory. Cite 2. as primary justification.

Commonwealth Government Securities On Issue | Source: Australian Office of Financial Management (AOFM)

5. Ignore the fact that while Federal Government public debt is “only” relatively small, our total Net Foreign Debt at June 2011 was almost $675 Billion, or over 50% of GDP (RBA Statistics, H5).

6. Ignore the fact that our banking system (thus, economy) relies on international money markets for some 40% of its “wholesale funding”.

7. Ignore the fact that in May 2011, Moody’s downgraded our Big Four banks’ credit ratings, cited their wholesale funding dependence as a key concern, and tacitly threatened the government that without the government’s explicit and implicit Guarantees propping them up, our Big Four banks would have their credit ratings slashed by at least two more ‘notches’.

8. Ignore the fact that in late June 2011, Fitch Ratings warned that Australia’s banks are amongst the most vulnerable in the world to the EU debt crisis, due to their reliance on wholesale funding from international money markets.

9. Ignore the fact that the spread on bond yields for Australia’s Big Four banks (versus non-financial institutions) have just hit record highs (from Bloomberg via SMH):

 Yields on bonds of Australian banks reached a record high relative to debt of the nation’s nonfinancial borrowers as Europe’s debt crisis threatens to freeze credit markets

Lenders including Commonwealth Bank, Westpac, ANZ and National Australia Bank Ltd., may need to sell about $144 billion of bonds in the 12 months ended June, 2012, according to a July research report from Deutsche Bank …

Trading conditions in the euro area have deteriorated this month as the region’s sovereign debt crisis deepens. Germany failed to get bids for 35 per cent of the 10-year bonds offered for sale on November 23 and traders were left seeking prices in the aftermath of a Spanish debt sale on November 17.

10. Ignore the fact that due to the very real vulnerability of our banking system, it is near-inevitable that the government will need to reinstate the Government (taxpayer) Wholesale Funding Guarantee to prop up our Too Big To Fail banks.

11. Ignore the fact that the government’s present “low” public debt comparison versus other countries is largely rendered a moot point, because the credit ratings agencies have already effectively served notice that they will have a lower tolerance for anything less than pristine government finances – and thus, a genuinely convincing case for return to surplus – due to the compulsion upon the Australian Government to (continue to) prop up a highly vulnerable banking system.

12. Blithely skip merrily through cherry-strewn intellectual fields, hand-in-hand with fellow groupthinkers, picking fruit and singing la la la la, wilfully ignoring the reality that (in the words of Senator Joyce) …

… “If you do not manage debt, debt manages you.”

Labor Begins To Steal Your Super

12 Sep

Barnaby was right.

From the Australian today (emphasis added):

Labor is planning to withdraw hundreds of millions of dollars from the Future Fund in an unprecedented move that will help the government meet its promise of returning the budget to surplus in 2012-13.

A spokeswoman for Finance Minister Penny Wong confirmed to The Australian that more than $250 million worth of assets were due to be withdrawn from the Future Fund in the 2012-13 financial year, despite the fund having been created, by Peter Costello, under the condition it was not to be touched before 2020.

The government, which has forecast a surplus of $3.5 billion in 2012-13 after several years of heavy deficits, claims that the assets will be returned to the fund at a future date.

But the opposition has slammed the move as “reckless and fiscally irresponsible”.

“The fact is that the government is planning to raid the Future Fund, including the revenue from the expected sale of Future Fund assets in its revenue forecasts, yet they haven’t been able to point us to where in the budget that money is supposed to be going back into the Future Fund,” opposition assistant Treasury spokesman Mathias Cormann said yesterday.

Mr Costello, the then treasurer, established the Future Fund in 2005 to cover the costs of future public servant superannuation liabilities. At the time, he told parliament: “The fund will only be drawn upon at the earliest in 2020 or a time when an independent actuary determines that the fund’s assets are sufficient to offset the unfunded part of the government’s accrued superannuation liabilities.”

The Future Fund’s own website sets out that “withdrawals from the Future Fund may only occur once the superannuation liability is fully offset or from 1 July 2020″.

A spokesman for the Future Fund confirmed the anticipated withdrawal was known to the fund and that this was the first time a withdrawal had been included in the budget bottom line.

Senator Cormann said the “real concern is that, if they get away with their plans to raid the Future Fund now they will do it again and again, every time they need more cash to fund their wasteful spending”.

“The Future Fund was set up by the Coalition after we paid off the Hawke-Keating debt and it shouldn’t be touched until the public service superannuation liability is under control,” he said.

Remember Barnaby Joyce’s forewarnings before this year’s May budget?

Before the budget (5th May):

In response to a question I put in Senate estimates, Treasury revealed that $64 billion of the difference between our gross debt and our net debt is made up of the cash and non-equity investments of the Future Fund. The Future Fund is there to cover the otherwise unfunded costs of public servants’ superannuation.

That is a little fact that the people of Canberra might be interested in. When Wayne mentions net debt translate that to, I am going to pay his debt off with my retirement savings.

And right after the budget (13th May):

Of course, the public servants will not be happy when we use their retirement savings, put aside in the Future Fund, to pay off some of Labor’s massive debt.

Barnaby was right when he forewarned of the US debt crisis.

And he is right again, about your super being stolen by our government.

Think it is only public servants’ super that is at risk of being stolen by our government?

Think again.

For quite some time now, your humble blogger has been covering the wave of government confiscations of private citizens’ retirement funds that has been sweeping the over-indebted Western World, and warning readers that it is going to happen here too.

The reason this has been happening in so many countries abroad, including the USA, UK, France, Ireland, Poland, and more?

Exactly the same reason as cited by our own government now.

To help meet the government’s budget targets. With the vague promise that the “borrowed” monies will be returned at some unspecified future date.

And we all know what most politicians’ promises are worth.

Barnaby Joyce is the only politician in our nation with the wisdom, foresight, integrity, and courage, to publicly confirm what this blogger has been repeatedly forewarning.

That government theft of private super savings, is a real and present danger here in Australia too.

And don’t kid yourself that a Coalition victory at the next election will save us.

The Liberal Party quietly announced a new policy on June 3 this year, that should have every citizen deeply concerned. It represents an even more blatant move to have the government get their hands on not only public servants’ super, but everyone’s super.

Learn more, in this most recent of my many previous blog articles on the topic:

Stealing Our Super – I DARE You To Ignore This Now

UPDATE:

Senator Wong denies that their plan is to steal public servants’ super.

Are you convinced?

I’m not.

Wong’s very opaque counterclaim is that they are “simply making a small change to the types of assets it holds”. The key here is having a very clear definition of exactly what is meant by “a small change”, and “types of assets”.

This denial in no way convinces me that Labor are not shuffling/stealing money (and/or figures) to meet their objective – a media headline of return to surplus in 2012-13. After all, this government has form for fiddling the books, as documented numerous times on this blog … and openly conceded by former Finance Minister Lindsay Tanner in his book after retiring.

And not just form for fiddling the books … there’s also this:

(March 2007) Peter Costello: Rudd will mortgage future, leaving kids to foot

(April 2009) Kevin Rudd raids Future Funds

Eastern Australia “In Deep Recession”, NSW & VIC Manufacturing “Stuffed”

14 Jun

What everyone with boots planted firmly on the ground already knows.

Which is exactly why our policians and mainstream media (seemingly) do not.

From Business Spectator:

Eastern Australia is in “deep recession” and the NSW and Victorian manufacturing industries are “stuffed”, the head of Linfox Logistics says.

Fresh from making a $68 million property acquisition in the mining boom state of Western Australia, Linfox Logistics chief executive Michael Byrne has dismissed suggestions the nation is dealing with a two-speed economy.

“It’s a parallel universe that bears no relation to anything else on this planet,” he told an American Chamber of Commerce event in Sydney on Friday.

If you look at the world, eastern Australia is in deep recession, in my view, as is New Zealand.”

WA was driving the national economy and Asia was a “different place again,” Mr Byrne said.

If we didn’t have mining, Australia would be like Portugal, Spain, maybe Greece and Ireland,” he said, referring to European debt problems.

Mr Byrne is right.

Referring to our near-total dependence on selling “red and black rocks”, Barnaby has warned the spendthrift Green-Labor Alliance … “God help you when the prices go down”.

God help us all.

Barnaby is right.

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