One of the funniest things this week was the federal government bragging about rating agency Standard & Poor’s reaffirming its AAA rating for Australia.
I guess we shouldn’t laugh, but it is all rather pathetic.
Just a reminder, late last year S&P’s was warning Australia if any “fiscal stimulus” designed to lift the economy out of the rut it was in involved “substantial spending initiatives and changes the trajectory of the budget, then doing so could increase downward pressure on our rating and outlook for Australia.”
At the time the government was planning net debt by June this year to be 19.5% of GDP and for it to fall to 16% by June 2023. Spending in this financial year was expected to be $510.5bn.
Now net debt is above 25% of GDP and on track to reach 44% of GDP by June 2024 and the government plans to spend $677.bn this financial year.
I guess not all “substantial spending initiatives” are the same ...
So much for worrying about debt.
But, bless them, S&P’s is still keeping up the pretence that it matters and once again this week it rolled out the “downward pressure” phrase.
It noted that it “expects fiscal deficits to narrow from fiscal 2022 onwards, even with proposed tax reforms and new expenditure measures announced”. But that “should this scenario not pan out as we expect, downward pressure on the rating may intensify.”
Please. Any government worth its salt should tell S&P’s to take its downward pressure and shove it.
Back last year when S&P’s was worrying about stimulus that might actually boost economic growth (something that was needed given 2019 was the worst year of economic growth in 28 years) the government was paying a record low interest rate of 1.15% on its 10-year borrowings.
Now, despite massive increases in debt, the government this week borrowed $2bn over 10 years with an interest rate of just 0.7672%.
Borrowing has never been cheaper, even though debt has never been higher.
But while S&P’s and other agencies might be just a figure of amusement for some, the problem is too many – especially those in the Morrison government – think they matter.
Just remember – ratings agencies don’t care about your welfare, standard of living, or employment prospects. They overwhelmingly care about the budget balance as though the government is a business or household that might not be able to pay its bills.
And this is important because thinking that ratings agencies matter is especially stupid during a recession.
Consider that S&P’s is already suggesting we need to start reducing the deficit in 2022. That is at a point the Reserve Bank is currently estimating unemployment will still be 7%, and wage growth will be just 1.75%.
That doesn’t strike me as a point where the economy is overheating.
The history of recessions is that they take a long time to recover from.
The 1980s recession took around eight years for the level of employment hours to return; the 1990s recession took 17 years, and the recovery from the GFC was so poor that when the Covid recession occurred we were nowhere near the peak level of 2007, let alone the previous peaks.
The history of recessions is one of long recovery and governments taking their foot off the accelerator too soon.
It happened in 1996 when the Howard government thought it was time for austerity. Were it not for the mining boom, we likely would never have recovered to the pre-1990s recession peak level of hours worked.
Even the ALP government in 2011 became too spooked about debt and deficit at time when the recovery was not yet complete.
But yes, we kept our AAA rating.
The celebration this week of our AAA ratings suggests this mistake is set to continue.
It would be nice if just once we had a government that cared less about the nation’s credit rating and more about its people.