Inability to build reserves in good times doesn’t bode well for future
Just how serious the mismanagement of our resources boom has been is highlighted by the latest report of the Norwegian sovereign wealth fund. Norway, with only 5 million people, has been able to set aside $720 billion in its sovereign wealth fund.
This fund has been built up from the revenues accruing from the oil and gas deposits in Norwegian territory. Yet Australia, a resources-rich economy, has managed to set aside no money in this period of high resource prices. Instead, it is running a large budget deficit.
In a long run context also, after the sale of the bulk of Australian government owned assets, our only reserve is a Future Fund of $80 billion. Even then, this is earmarked to help meet unfunded government superannuation liabilities in excess of $200 billion and increasing annually by around $10 billion.
Standard & Poors has warned Australia is at risk of losing its AAA rating if the federal budget deficits continue for as long as the government is suggesting. The harsh reality is that a sustained fall in commodity prices would create havoc for both the federal and state budgets.
Successive governments have focused on spending money in good times and not worrying about the future. While Australian debt levels are relatively low by international standards, this doesn’t guarantee future problems could be avoided as they were in the global financial crisis.
The government could spend lavishly to deal with the impact of the financial crisis because of the reserves built up by the previous government. But with those reserves gone and the Future Fund inadequate to meet the government’s unfunded super liabilities, the funds available to deal with a new crisis, should it occur, are limited.
This month’s budget will reveal details of our current budgetary situation. Judging by past errors in projecting revenues and outlays, these figures may still present an optimistic picture of our financial situation, which could quickly change. Before the collapse of its banking system, Ireland had a relatively low debt to gross domestic product ratio. It now has an extremely high debt to GDP ratio and will struggle for years to deal with its deficit problems.
The Australian banking system looks to be in an extremely strong financial position and a collapse of our housing market doesn’t appear to be a major possibility. Nevertheless, our inability to generate surpluses while the economy has been performing well provides little reason to be confident of our ability to deal with a serious future downturn.