The AAA rating for policy contradictions on display

Global ratings agency S&P has spoken a truth that has struggled to be heard as widely as it should be in a federal election campaign that seems determined to ignore the big issues. Top of the list of big issues must be the economy, which S&P warns – contrary to assurances from the Albanese government – has drifted into dangerous territory and is at risk of jeopardising Australia’s AAA credit rating. Throughout the election campaign, cost-of-living assistance has taken precedence over good economic management when what is on offer from both sides will only push the day of reckoning into the future. As Greg Brown outlined on Monday, Anthony Albanese has emerged as a bigger spender than Bill Shorten was proposing to be at the 2019 election where he was rejected at the ballot box. The difference is that where Mr Shorten outlined revenue as well as spending measures, the Prime Minister has been unable to provide detail on how his big-spending policies will be paid for.

Finance Minister Katy Gallagher admitted on Sunday the federal budget was under “enormous stress” but said returning it to surplus would be “dependent on a lot of decisions being taken in the future”. Hold on to your wallet.

The latest budget, handed down by Jim Chalmers immediately ahead of the May 3 election being called, included a decade of deficits, with rising income taxes through bracket creep required to bring the books back to balance in 2035-36.

Monday’s warning from S&P reflects a bigger policy confusion in which spending that is taken off-budget is considered immune from fiscal discipline; where productivity-destroying initiatives in industrial relations are sold as nation-building; and where booming spending in the public sector is confused with hard investment in the real economy.

Inaugural Productivity Commission chair Gary Banks says the Albanese government is guilty of repeatedly presenting its anti-productivity initiatives as solutions to the country’s productivity problem. This is true across the board.

Peter Dutton, meanwhile, has spoken of the need to tackle bracket creep in personal taxes and to restore guardrails to spending by government as a portion of GDP, but has lacked the cut-through needed to jolt the electorate to understanding.

S&P is not so easily misled. It says the AAA rating on Australia may be at risk if election promises result in larger, structural deficits, and rising debt and interest expenses. S&P says the budget is already regressing to moderate deficits as public spending hits post-war highs, global trade tensions intensify and growth slows.

With China digging in for what could be a protracted trade war with the US, Australia is ill-prepared to deal with the potential for global shocks. This is in stark contrast to the healthy budget position inherited by Kevin Rudd before the global financial crisis in 2008 and what existed before the outbreak of the Covid-19 pandemic. The trade war threatens to reignite inflation in the US and impact demand and the prices for the energy and resource commodities that have underpinned our prosperity.

S&P says spending commitments being made in the lead-up to the federal election will need to be funded at a time when the government is grappling with rising international trade tensions, economic uncertainty and fast-growing structural spending in areas such as the National Disability Insurance Scheme, defence, health, aged care and interest on government debt.

Big deficits at a state level – racked up notably by long-serving Labor governments in Victoria and Queensland – could drive the general government fiscal deficit to a level rarely seen since the immediate aftermath of the GFC (outside pandemic-affected years).

S&P says if major election commitments aren’t funded via additional revenues or savings, the deficit could widen further. The Albanese government was “obfuscating” Australia’s fiscal position and borrowing needs further by relying on the “underlying cash balance” as its preferred fiscal metric and the use of “off-budget” spending.

The danger is a returned Albanese government will resort to revenue-raising measures that will only make the productivity equation worse.

Plans to introduce a tax on unrealised capital gains is bad policy that is likely to quash investment and produce a wide range of unintended consequences. What is needed is budget discipline on spending and policy settings that promote investment and grow productivity rather than slug harder those attempting to provide opportunity and lesson their burden on government largesse.