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Morrison: we need to stay on the path
With Standard & Poor putting Australia on notice Treasurer Scott Morrison says it underlines the government's fiscal plan. Vision ABC News 24.
PT3M12S 620 349Standard & Poor's has just made your mortgage cheaper. While its first message is aimed squarely at our politicians (it wants "more forceful fiscal policy decisions") its second is directed to the Reserve Bank. The bank has room "to lower policy interest rates from their current level of 1.75 per cent to support growth".
And it'll need to. So little patience has Standard & Poor's with the forecasts in Malcolm Turnbull's first budget that it mocks them. The budget forecast deficits "on average 0.5 per cent of GDP weaker over the years 2016 to 2019 compared with the previous budget".
Standard and Poor's has little patience with the forecasts of Malcolm Turnbull's first budget. Photo: Reuters
"The current projection date for a balanced budget in fiscal year 2021 is now eight years later than the previous government's earlier projection of fiscal year 2013, which it made in 2009; and, if achieved, it would come more than 10 years after the global recession initially pushed the central government budget into deficit."
It sees next to no chance of the forecasts being achieved in any event. The spot iron ore price, assumed in the budget to be close to $US60 dollars a tonne, will be closer to $US40 dollars a tonne, smashing revenue. With a chance that neither of the big parties will be in charge of either the Senate or the House of Representatives, there's little likelihood of a cutback on spending.
Not that restraining the deficit need be particularly hard.
In March, the Committee for Economic Development of Australia set out five options for cutting spending by $2 billion per year and boosting revenue $15 billion. Several are Labor policy: axing negative gearing, halving the capital gains tax discount, cutting the private health insurance rebate by 25 per cent, cutting industry tax concessions across the board by 25 per cent and boosting petrol tax by 10 cents per litre. What wouldn't and couldn't be on either its or Standard & Poor's agenda is an unfunded cut in the company tax rate.
To the extent that the government cares about its triple-A credit rating and is able to take Standard & Poor's advice, it'll make cuts that hurt. Which leaves fixing the economic damage up to the Reserve Bank.
Its board next meets on August 2. It's now extremely likely to cut its cash rate again on that date, to 1.5 per cent, in anticipation of what Standard & Poor's will make the government do, and then to cut it again. The threat to our credit rating means that from now on, the government will taking more of the responsibility for fixing the deficit and the Reserve Bank more of the responsibility for managing the economy.
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