Albanese and Dutton’s election spending promises will result in big tax rises, spending cuts
In simple terms, global credit rating agency Standard & Poor’s are telling Australians the horrible truth. The spending promises made by Anthony Albanese and Peter Dutton will require big rises in taxes or substantial cuts in expenditure to be delivered. If that doesn’t happen, then Australia’s AAA credit rating is in great danger.
S&P did not use those words, but let me take you through the grim reality they will have found in New York when they looked at the facts.
Neither the Prime Minister nor Opposition Leader faced those facts in the campaign. Dutton knows the truth and had to choose between highlighting the mess or joining the Albanese spendathon. If the opinion polls are right and Dutton loses the election, he made the wrong decision.
For S&P, the starting point would have been the 2025-26 budget and forward estimates, which showed Australia was running at an unsustainable cash deficit rate of $70bn per year and well into the future. There was no plan to reduce or repay debt as it spiralled upwards to $1 trillion and beyond.
The rating agencies were fully aware of the depth of the Australian crisis because a former premier of the nation’s second-largest state by population, Victoria, Jeff Kennett had warned the rating agency that unless S&P and other agencies slashed the credit rating on Victoria’s debt to its correct level they might be sued by the Victorian people.
The former premier’s argument was that Victoria was in a desperate situation and an out of control.
Government borrowing could only be curbed by a downgrade in rating. This was a very new concept for the New Yorkers, and it focused more attention on Australia. They realised S&P has been hoodwinked by false Victorian budgets.
The Victorian government has been told it must slash its expenditures and on Victorian budget day, May 20, S&P will discover whether Victoria has responded.
One of the reasons the rating agencies have not downgraded Victoria’s rating is they believed the Commonwealth government would in the end bail Victoria out.
The combination of the unsustainable $70bn annual cash deficits for the foreseeable future and the election spendathon, added to the Victorian mess, makes the nation’s AAA rating problematic. The Victorian budget and its implementation will be very important to the nation.
The election spendathon was exactly what Australia didn’t need because the global outlook for the nation is deteriorating.
Looking ahead, we discover the price of low grade iron ore has slumped, and that slump will extend into higher grades.
The industrial relations legislation, plus severe environmental and native title rules, means Australia is no longer a reliable supplier of iron ore, gas and coal, which is a disaster given the world is now moving into an oversupply situation. The base of Australia’s tax revenue is therefore under threat.
Australia’s great competitive advantage has been its low energy costs but, unlike the US, China, India, Indonesia and many other countries we have decided to kid ourselves into believing renewables are low cost when of course the infrastructure and backup facilities make renewables high cost.
Power costs are naturally rising, while the subsidies to conceal that fact from the nation adds to the deficit. On the other hand, the immense gas discovery at Beetaloo in the Northern Territory when combined with renewables gives us the opportunity to stabilise or lower energy prices.
Given it was in the middle of an election campaign, it’s not surprising both the PM and Treasurer discounted the S&P warning. But, the nation has to understand the rating agency was telling us the truth.
On the other hand, although Australia is going to suffer from the downturn in North America and China we will be helped by lower global interest rates, which will reduce the likely impact of the looming rating downgrades.
Jim Chalmers in his public statement understands the need for productivity improvements in both the private and government sectors. But, productivity improvement is going to be made much more difficult by the industrial relations legislation, but it is essential given we are going to live in a tougher world.
Meanwhile, it is ironic Victoria may be forced to show the nation what happens when you ignore rating agencies and undertake rampant borrowing; lower productivity and allowing the extremists to destroy your low-cost energy advantage.
The May 20 budget for Victoria could be a warning for the nation. That’s what happens when you don't tell rating agencies and the community the truth.
And of course, that’s why it was postponed until after the federal election.
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