Speaking at a lunch in Sydney, Standard Life Investments chief economist Jeremy Lawson said Australia’s tax share of GDP has declined 1.3 percentage points since 2003, “despite the increase in government finances generated by the commodity boom and rapid income growth before the global financial crisis”.
Mr Lawson said that meanwhile, the government’s spending share of GDP has increased two percentage points in the past decade, slightly above the OECD average.
“Australian governments have rested on their fiscal laurels during the commodity price boom and rather than squirrel large surpluses away for a rainy day, governments have satisfied voters’ appetite for lower taxes and more generous spending,” said Mr Lawson.
If Australia fails to “reverse its structural fiscal slippage”, the nation could risk losing its triple A status, he said.
According to Mr Lawson, politics will likely have a large impact on this, given that when Standard and Poor’s downgraded the United States, one of the things cited was the inability of Congress to make decisions, which limited its ability to effectively implement changes.
“It’s very difficult to implement structural fiscal measures in the current political climate in Australia so it’s possible that may be a trigger,” said Mr Lawson.
Even though both parties ideally want to return to surplus, he said, this cannot be achieved in practice because the parties cannot agree on how to do it, so the deficit remains at its current level.
Given the “continual political squabbling” and inability of the government to get things through the Senate, there may be potential for a downgrade.
The next global downturn could be “frightening in the way that it plays out in certain places”, Mr Lawson said, adding that countries like China and Australia, which “came out relatively well last time, are probably going to come out relatively badly next time”.
According to Mr Lawson, there will likely be a greater slowdown in China the next time that a correction occurs, which will have significant ramifications for Australia.
While Standard Life Investments expects the global economy to improve over the next two years, these risks need to be considered in the medium term, Mr Lawson said.
