Don't be complacent about Australia's top credit rating: Treasury secretary John Fraser

Australia should not be complacent about maintaining its top credit rating, which depends on achieving budget repair and a more diverse economy, Treasury secretary John Fraser has said.

Fraser highlighted Australia’s debt challenge and the importance of tackling spending in a speech about the budget context, delivered to the Sydney Institute on Thursday.

Observing that Commonwealth gross debt was projected to reach 29% of GDP by June 2018, he said that “even during the volatile 1980s and 90s, debt did not reach such heights, peaking at around 24%. Net debt is approaching levels not seen since the early 1990s recession, which at that time was the highest since World War Two.”

About two-thirds of Commonwealth public debt was held by non-resident investors which, “if anything, leaves Australia’s fiscal position a little more exposed to shocks in global capital markets,” Fraser said.

“The Commonwealth’s interest bill has reached over a billion dollars a month. This is projected to more than double within the decade, unless action is taken to improve our budgetary position.”

The debt burden and servicing costs were growing with each budget deficit and would grow even faster when global bond yields inevitably normalised, he said.

“It’s important that Australia maintain its top credit ratings, which helps to contain the costs associated with servicing public debt. Australia is one of only ten countries with a triple A credit rating from all three of the major rating agencies, reflecting our reputation for fiscal prudence.

“But this rating is dependent on credible fiscal consolidation and a smooth transition to a more diverse economy.

“We should not be complacent about this,” he said, emphasising the importance of a strong credit rating to investor confidence.

If Australia were to permanently reduce net debt, it would have to achieve sustained “structural” budget improvements.

The immediate priority was to repair the fiscal position – both structural and otherwise.

“The more we can do to limit net new policy spending, the better”, including changing priorities in spending within portfolios, he said. “For the longer term, we need to look for substantial structural savings across the board – including transfer payments.”

At the December budget update, Commonwealth spending as a proportion of GDP was estimated at 25.9% in 2015-16, projected to fall to 25.3% over the forward estimates.

Fraser said there had only been four other periods since 1970 when this ratio had exceeded 25%. Three were associated with economic recession and deficit blowouts – during the early 1980s and the 1990s and just after the global financial crisis.

If payments stayed too high and at 25% of GDP or more, receipts would need to be increased very substantially to balance the budget. But simply increasing the overall tax burden to raise more revenue would run the real risk of distorting incentives and lowering international competitiveness, harming investment, growth and job creation.

Fraser said while it was a matter of judgement, “seeking to keep spending below 25% of GDP may be a useful marker. This would mean that we would seek to avoid having spending reach or exceed the levels met in periods of especially adverse circumstances in the past few decades.”

Over the longer term, economic growth would be critical for fiscal sustainability and continued improvements in living standards. That would need structural reforms to enhance productivity, including tax reform. “The arguments for a tax mix switch rest heavily on encouraging more jobs through a higher growth path. Tax reform is a complex issue and is very much the focus of the government at the current time,” Fraser said.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.