Heightened risk adds to the Treasurer’s budget challenge

Whether Scott Morrison or Chris Bowen becomes treasurer after July 2, they will inherit management of an economy plagued by risks.Picture: AAP Image/Sam Mooy.

Today’s lock up will mark the 42nd time I’ve been involved in covering the budget and I’ve watched 13 treasurers do their stuff.

Each year I enjoy communicating with readers some of the hidden messages that are contained in every budget. And Scott Morrison’s 2016 budget will be no exception and I will be with you when he concludes his speech this evening.

For Scott Morrison to join the two great treasurers of that 42-year period, Peter Costello and Paul Keating (alphabetical order), he has to personally go through the budget line by line and cut out the waste. That’s what they did.

Currently, there is plenty of waste because the ‘line by line’ job has not been done since Peter Costello stood down. Scott Morrison does not appear to have gone through the 2016 budget line by line partly because it’s his first budget and partly because it’s an election-year budget.

If the Coalition wins the election on July 2, then in 2017 we will discover whether Morrison is a Costello/Keating.

Unfortunately, the public servants usually bamboozle treasurers undertaking their first budget, so it is likely that Morrison will be caught out.

However, whether its Scott Morrison or Chris Bowen who becomes treasurer after July 2, they will inherit management of an economy plagued by more risks than any recent treasurer has encountered.

Our economy is much more exposed to world fluctuations than we have experienced in our recent history. And our export building blocks — iron ore, LNG and coal — are the subject of enormous speculative variations.

To help me with my pre budget commentary, CP Economics’ Callam Pickering forwarded me this graph which shows just how vulnerable we are. I doubt whether any such graph will appear in the budget:

Source: CP Economics

You will see that in terms of government debt we are way below other major countries. But our personal debt is the highest of those in the graph. In short, our population borrowed heavily to invest in housing stock.

That housing stock does not produce export income but it does help accommodate a rising population.

I am afraid that debt will stunt our growth in future years.

And look across to the graphs on the left, which show the huge rise in China’s debt. A portion of that debt boosts Australia via purchases of our resources and investment in our dwellings and property.

China is undergoing a transformation but it is not finding it easy to get off the debt treadmill. Last year and early this year, the country found unemployment was rising and endangering the China social accord. So they reignited the closed steel furnaces and stimulated the economy with more debt. Our iron ore prices responded, making the job of Scott Morrison that much easier.

But it is also a warning of the risks future Treasurers may face.