The Australian economics media is awash with claims that Australia will likely lose its AAA government bond credit rating next week in the wake of last week’s disastrous GDP figures (negative growth recorded in the September-quarter 2016) and the widening fiscal deficit at the federal level as tax revenue slumped 15.3 per cent in the September-quarter and the trade account deficit widened. This is a non-news story really. I was asked by a journalist to comment on it the other day and I told him that he would be better-off sorting his socks in his drawer than wasting any time on this topic. A real problem, which, in part is being created by this obsession with ratings, is the massive and growing shortfall in public infrastructure in Australia and other nations as governments cut back public investment in an attempt to reduce fiscal deficits. The reality is this: What the credit rating agencies do is irrelevant to the Australian government. What is not irrelevant is the growth in public infrastructure. It is our legacy to our grandchildren. With populations getting older and dependency ratios rising, the next generations will have to be more productive than the current generation if standards of living are to be maintained, much less, increased. That will require better public infrastructure. Our stupid austerity mindset – justified by on-going lies about the government running out of money and being degraded by the rating agencies – is undermining the very strategies and actions that we require to benefit our children, their children and ourselves as we age. We are a really stupid nation.
On the AAA credit rating the facts are obvious:
1. The credit rating agencies have been proven to be corrupt and are motivated purely to make profits and seize headlines when they can to further their profit making.
2. They have zero relevance to the affairs of a currency-issuing government.
3. Such a government is never revenue constrained because it is the monopoly issuer of the currency. It can never run out of money. It does not need to borrow – ever, should it choose not to.
4. The central bank allied with such a government can always control the yields on any debt the government chooses to issue, including setting them to zero if it so chooses.
5. The bond markets can never set the terms – AAA credit or otherwise – on the bond auctions if the government chooses otherwise.
6. It is all an elaborate charade that the neo-liberals have invented to line the pockets of these corrupt and unproductive companies and limit the capacity of governments to spend on advancing the well-being of the general citizenry.
7. A negative GDP figure, falling tax revenue, a widening trade deficit might represent issues of concern depending on context but they are totally irrelevant to the risk rating of the debt liabilities of a currency-issuing government. That is because there is zero risk attached to these liabilities.
8. Such a government can always meet the obligations associated with any outstanding liabilities denominated in its own currency.
Ok! Now if you think otherwise, I am sure your socks need re-arranging in your bedroom drawer.
Now to the real story – how austerity cruels the future of our children and their children.
Last week, Australia learned that our economy went backwards in the September-quarter on the back of both declining private and public investment.
Household consumption, albeit still positive, is weak and households are burdened down with record levels of debt (to disposable income).
The perfect storm is forming.
The lastest property price data from the Australian Bureau of Statistics (ABS) released yesterday – Residential Property Price Indexes: Eight Capital Cities, Sep 2016 – revealed that in the September-quarter, property prices inflation was the lowest in last three years, signifying that the credit boom-property spiral is coming to an end.
The ABS said that:
Residential property prices rose 3.5 per cent through the year, the weakest growth since March quarter 2013 and a decline from the peak of 10.7 per cent a year ago.
In some capital cities (Perth and Darwin), which had experienced real estate booms as a result of their strategic locations viz the mining boom, prices actually fell.
The ABS also reported last Thursday, the day after the poor National Accounts data came out for the September-quarter, that the trade deficit in October, widened by 21 per cent on the September result.
Exports (goods and services credits) rose by just 1 per cent in October while imports (goods and services debits) rose by 2 per cent.
When the National Accounts data indicated that the Australian economy had slumped by 0.5 per cent in the September-quarter 2016, a host of commentators (bank economists etc) came out claiming it was a blip and all the more recent data (remembering that the national accounts is a three-month old rear-view mirror version of what happened) was positive and that a recession was unthinkable.
I wrote that we were on an inexorable path to recession unless there is a policy change.
The day before the National Accounts data was released, we learned that the federal government’s tax revenue had fallen by 15.3 per cent in the September-quarter.
Key economic policy commentators including the Treasurer chimed in about the need to bear down even harder on government spending to compensate for the loss of revenue.
If an Economics 101 students had have written that in an examination, they would have certainly failed and advised to take up some area of study that was more in fitting with their propensities.
For they would have disclosed they knew nothing at all about macroeconomics and couldn’t even logically understand that if non-government spending was tanking then a recession was inevitable unless government net spending rose to fill the gap.
$-for-$ that has to happen. Ideologically, one might have disdain for government net spending (deficits).
But to claim that when non-government spending is weak and contracting, which reduces growth and government tax revenue (which is linked to economic activity, for example, income taxes), that the appropriate response is for the government to follow suit just demonstrates wilful ignorance.
That is, if one still purports to be following a “jobs and growth” policy strategy, which is the catchcry of our incompetent federal government.
The only credible claim would be that you want to cut government deficit spending at the same time as non-government spending is tanking because you prefer recession with rising mass unemployment and lost incomes.
But these bastards know that if they told the truth then they would lose all political capital – that position would be unacceptable to any resonable citizen.
So they lie.
Which is why the ignorance, if it is that, is wilful. Criminal in fact.
Last week (December 8, 2016), the former head of the Commonwealth Treasury Ken Henry who now is the boss of one our big 4, money grubbing commercial banks, responded to the National Accounts result by calling for higher fiscal deficits to be realised in the form of increased public infrastructure investment.
He told a gathering of the Australia-Israel Chamber of Commerce in Sydney that the Federal Government should (Source):
… dispense with partisan politics over budget repair … My observation in Sydney, in Melbourne, today is that people already think – with very good reason – that the ratio of population to infrastructure is too high … This is the course we have charted for ourselves because we are incapable as a nation of thinking about infrastructure in the way we should be thinking about infrastructure…We need more politicians to have the courage to point it out and to motivate action.
The point he was making (and his logic about fiscal deficits being problematic was flawed) was that Australia is being starved of public investment because of the mindless domination of neo-liberal deficit fetishism, which is shared by both major political parties.
The lack of courage to break out of this destructive Groupthink has left the nation with crippled infrastructure systems – poor urban design, failing transport systems, dangerous bridges and supporting infrastructure, etc.
So while he contributed to the malaise in terms of talking about “finding a bi-partisan solution to ‘dealing with the fiscal mess we have got'”, his observation on the failure of governments in Australia to deal with the decaying infrastructure as our population grows is valid.
The fact is that government spending on public capital formation (investment) has fallen sharply in real terms since 2011-12, which was when the Federal government prematurely abandoned its fiscal stimulus and started to rave on about getting back to surplus as quickly as possible.
National government investment has fallen by 3 per cent, State and Local by 4 per cent and overall, the public sector investment spending (in real terms) has contracted by 6.5 per cent.
Public gross fixed capital formation peaked at $A79 billion in real terms in 2012-13, partly as a result of the spending associated with the fiscal stimulus which saved the Australian economy from recession. Private capital formation peaked in the same year at $371 billion in real terms.
Since that time, public investment has fallen in real terms by 6.6 per cent and private investment has fallen by 7.9 per cent.
Responsible fiscal policy would never see that coincidence of spending cuts, especially with elevated levels of labour underutilisation, declining growth and deflationary forces emerging.
Infrastructure Australia, a government body that is provides advice to the Government on infrastructure priorities estimated there was a massive infrastructure spending gap in Australia in 2015 across transport, energy, telecommunications and water sectors.
All essential sectors for ensuring high quality economic growth and service delivery.
It also notes that in its most recent National Infrastructure Audit (released April 2015) – Australian Infrastructure Audit: Our Infrastructure Challenges – that:
1. “Australia’s population growth is high by developed world standards, especially in our cities”.
2. “Australia’s population is expected to grow from 22.3 million in 2011 to 30.5 million in 2031. The national population has already increased by more than one million people since 2011.”
3. “We ranked fourth out of 40 OECD countries for population growth over the decade to 2012, and were the fastest of those with a population over 10 million.”
4. “The available international comparisons suggest that … the overall quality of our infrastructure lags behind comparable nations.”
5. “the World Economic Forum has ranked the quality of Australia’s infrastructure 20th out of 144 countries. Some of the poorest scores were for the quality of Australia’s roads and ports. The World Bank’s Logistics Performance Index 2014 ranked Australia’s trade and transport infrastructure 16th in the world.”
The overall message from the Audit is that the quality and quantity of Australia’s public infrastructure is falling singificantly short of what is required by population growth and unless there is a change of policy, the gap (shortfall) will widen over the next 15 years.
And so on …
Just try driving in Sydney and Melbourne these days – everything crawls along. I am consistently having to allocated more time for getting to destinations because of these delays. Multiply that by tens of thousands of workers every day – and a lot of lost productive endeavour is racked up.
There is a massive public sector investment requirement staring us in the face and yet the austerity mindset of the government stands in denial as it hacks into spending.
Not something a nation who claims to be innovative and clever should be proud of. And remember, Infrastructure Australia is a government body.
Other estimates of the infrastructure shortfall from non-government bodies confirm the immensity of the problem.
We have been here before. For example, the State governments in Australia became infested with the ‘fiscal surplus’ obsession in the 1990s and started to cut back public infrastructure spending.
Between the June-quarter 1986 and the March-quarter 2003, State and Local government gross fixed capital formation went from 2.6 per cent of GDP to 1.6 per cent of GDP (a value decline of around $A2,072.7 million – a massive cut.
Sure enough they recorded surpluses but then, for example, on March 27, 2003, a major rail bridge (Menangle Bridge in NSW) was closed because there were fears it was about to collapse. It was subsequently re-opened after extensive work with reduced train speeds. That is not an isolated case study of what I am talking about here.
On a global scale, I have written about my experiences in Manchester (UK) when I was studying for my PhD during the Thatcher years.
Fiscal austerity starved essential public works maintainence with catastrophic results, which ended up requiring much higher public outlays to remedy the situation that would have been spent on on-going maintenance.
Please read my blog – The myopia of fiscal austerity – for more discussion on this point.
More recently, the Cameron government in Britain demonstrated it hadn’t learned any lessons from that period – please read my blog – British floods demonstrate the myopia of fiscal austerity – for more discussion on that point.
Overall, austerity-obsessed politicians typically cut public infrastructure spending first because it is less obvious to people.
Cutting a pension cheque, or some school support has fairly immediate impacts and, as such, invokes negative political conquences almost from the outset.
But cutting maintenance spending on bridges, or failing to continue developing public transport systems is more easy to hide. The decay occurs by stealth as the infrastructure ages, or the population steadily grows to swamp the existing infrastructure.
Eventually, we realise that our quality of life has been eroded but by then the political cycle has moved on and, in many cases, the culprits have retired on fat public sector retirement pensions and are swanning around on corporate boards channeling information and networks they built up during their political careers into the pursuit of private private.
The lax rules which govern the shift of retiring politicians from Ministerial positions to private sector lobbying and consulting positions is another topic altogether. I have been collecting data on the incidence of that behaviour and it is truly disgusting. But another day on that.
The public investment ratio (to GDP) has now fallen to 4.4 per cent (September-quarter 2016) from 6.6 per cent in the March-quarter 2010. Over the same period, the private investment ratio has been falling also.
The private investment ratio peaked at 23.4 per cent of GDP in the March-quarter 2008 and now stands at 19.9 per cent.
Once again, we see the absurdity of the public investment commitment falling at the same time as private investment is falling and the overall economy is heading into recession.
The former Treasury head told his audience last week that Australia will require “building a city the size of Canberra every year, for the rest of this century. Or, how about creating a new city equal to the population of Melbourne every decade?” (Source).
He said:
The Australian population is growing by something like 400,000 a year. Think of it: a new Canberra every year between now and the end of the century. Or, put it this way, every five years building a brand new city from scratch in Australia for 2 million people …
Or put it this way: building a whole new city the size of Melbourne every decade between now and the end of the century
For overseas readers – Canberra’s population is 356,585, and Melbourne’s is close to 5 million, at present and growing fast.
So his way of pointing out how dire the infrastructure crisis is is to scale it by something we know about – the roads, bridges, water ways, power supplies etc of Canberra or Melbourne. In other words, a huge challenge.
The national accounts and demographic data also points to a decline in public capital expenditure per capita. This has slipped from $A1000 per person to less than $A800 now (Source).
One of the drivers of the cuts in public infrastructure spending (as % of GDP and in absolute terms) is the “fear of triggering a downgrade in the federal government’s AAA credit rating”.
There it is again.
A totally confected (made up) scare campaign which is undermining the quality and growth of our essential infrastructure services.
Conclusion
The cuts in growth of public investment will resonate for generations to come and be realised in lower material standards of living and lower productivity growth.
We really are a stupid people for tolerating this idiocy.
And before I stop – I don’t want to ever hear the argument again – that governments should borrow now because “debt is also still very cheap” or that “the credit ratings agencies may not downgrade the government’s rating if the extra debt is being used for productive infrastructure, as opposed to recurrent spending on social welfare or public sector wages.”
Please. On both counts.
What the credit rating agencies do is irrelevant to the Australian government. In fact, I would just outlaw their operations within our national borders and clear up office space for more useful activities.
What is not irrelevant is the growth in public infrastructure. It is our legacy to our grandchildren.
With populations getting older and dependency ratios rising, the next generations will have to be more productive than the current generation if standards of living are to be maintained, much less, increased.
That will require better public infrastructure.
Our stupid austerity mindset – justified by on-going lies about the government running out of money and being degraded by the rating agencies – is undermining the very strategies and actions that we require to benefit our children, their children and ourselves as we age.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.