Nation’s triple-A rating heading for trash can of history

SLOWLY but inexorably and seemingly inevitably the downgrades are lapping closer and closer to our nation’s triple-A, writes Terry McCrann.

Scott Morrison delivering the 2017 Budget in parliament. Picture: Kym Smith

SLOWLY but inexorably and seemingly inevitably the downgrades are lapping closer and closer to our nation’s triple-A.

Ironically — appropriately, poetic justice-style? — the government’s move to grab a seemingly “easy” (and popular) $6 billion from the wicked big banks, to help reduce the Budget deficit which is regarded as the biggest threat to the triple-A, could actually end up being the ultimate downgrade trigger.

The midyear Budget update just before Christmas has now become the next absolutely critical test of the triple-A — unless we get hit by some left-field financial or economic disaster.

But even if we get through the midyear update, the 2018 Budget looms as the fiscal brick wall — that will likely come crashing down on the triple-A.

After the latest Budget, all three rating agencies reaffirmed their triple-As, on the basis of the government’s pathway back to a Budget surplus. That’s one big tick.

Two of the three — Moody’s and Fitch — also reaffirmed their “stable outlook” rating tags. That was a second big tick.

Only S&P had previously had a “negative outlook” tag with its triple-A. It left it unchanged; it didn’t remove it, but it also didn’t go the next step down: you might call that a half-tick.

However, both S&P and Moody’s expressed considerable scepticism over the Budget forecasts that it would be back in surplus in the 2020-21 year.

Any sign of such “scepticism” turning into reality would almost certainly trigger a downgrade. That’s why the Budget update in December is so critical.

The way the Budget forecasts are done, the government won’t have to revise them totally in December; but it will have to include more up-to-date forecasts for the major economic variables.

Two in particular could bring the Budget — and the triple-A — undone. These are the forecasts for solid and sustained growth in jobs, and for also sustained but even healthier growth in wages.

These are critical for realising the mind (and wallet) numbing $60 billion-a-year forecast leap in personal income tax by 2020-21 — the major, the only, reason the Budget is able to forecast a surplus in 2020-21.

However, if the economic forecasts — and the forecast 2020-21 surplus — survive the midyear update, there is a whole new problem in the formal Budget next May.

 

AT that point the 2019-20 year moves from a “projection” to an “estimate” — and to much more rigorous analytical forecasting, not just an “assumption” of an economy whirring along.

It’s not well understood that 2019-20 is the critical year for the forecast of getting back to surplus. It is the year when the deficit is supposed to suddenly and felicitously disappear.

In 2018-19 the deficit is “estimated” at $21.4 billion. In 2019-20 it is “projected” to drop to just $2.5 billion.

This enables the Budget to move into surplus the next year.

In my view, the 2018 Budget will find it impossible to sustain that fiction of a disappearing deficit. That means the 2020-21 surplus will also disappear, and along with it our triple-A.

So back to the banks. On Monday S&P downgraded almost all our financial institutions. The only ones it left untouched were the big banks.

Why? Because they are seen as “too big to fail”, effectively guaranteed by the triple-A-rated federal government. But, and it’s a very big but, if the rating agencies begin to believe that therefore all the big bank borrowings have to effectively be added to the actual federal debt for the rating assessment, then suddenly we don’t look like a triple-A.

That’s why the levy could be so potent. The government already guarantees ordinary bank deposits up to $250,000. The levy, which is applied to all liabilities except deposits could be construed by the agencies as a de facto payment for whole-bank guarantees.

Even if they don’t explicitly do that, any sign of weakening in bank profits and balance sheets would flow negatively into the triple-A assessment. Then, at the slightest weakening in the Budget, the triple-A would go.

Two final points.

Once the triple-A goes it would be a long, long haul back. Last time it took 20 years to get it back, and we really only got it back, first thanks to the 1990s and some hard economic and fiscal reform, and then in the 2000s thanks to China.

I would suggest if we lose it, we would lose it for all time. Just as I don’t think we are going to see a Budget surplus this side of the 12th of never.

Secondly, losing it will hurt us; maybe not quickly, and in the early days not so obviously. But over time our standard of living will slide and slide significantly.

 

FAKE EXPLAINING, FAKE FISCALLING

THE government’s claim that the bank levy will raise $6.2 billion over four years lacks, well let’s say, “credibility”.

The four big banks said on Monday that it would only cost them $965 million a year not the $1600 million budget forecast. The last and smallest, Macquarie, ain’t going to provide the rest.

What will, says the government, is that the banks will only claim the tax deduction for paying the levy in the following year.

But even if they did, the only way you’d then get the levy up to $1600 million or so in the next year is if the banks lifted their (levy-taxable) liabilities by a stunning 50 per cent, in a single year!

No, that’s “fake explaining” layered on “fake fiscalling”. The truth the government doesn’t want to admit is that Treasury estimated the banks would pass the levy on to customers.

Originally published as Nation’s triple-A rating heading for trash can of history