Government debt and the capex black hole: Pete Wargent

Government debt and the capex black hole: Pete Wargent
Government debt and the capex black hole: Pete Wargent
Couldn't think what to blog about today - creative juices aren't flowing at all, perhaps I need black coffee - so thought that for something different I'd take a look at Australia's oft-discussed government debt, and a few forecasts from the Australian Office of Financial Management (AOFM).

The unemployment rate in Australia has declined from 6.3 percent to 5.7 percent since the beginning of 2015, taking the trend unemployment rate to its lowest level in 34 months at 5.71 percent.
 
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Government debt and the capex black hole: Pete Wargent

The supporting figures, however, show that we are absolutely miles away from full employment, with oodles of part time work and under-employment around. 

Indeed, tomorrow's capex report will likely show that the collapse of business investment in the mining sector has spilled over adversely into associated parts of the services and manufacturing sectors (since some of these businesses naturally provided inputs into the resources investment boom - warehousing, transport, equipment manufacture, and so on).

In effect, via the unwinding of mining capex resources regions will be experiencing the multiplier effect of the mining investment boom in reverse, sucking some mining-dependent regions in Western Australia and Queensland into a gravitational black hole. I think this has already happened, in truth, the data will just confirm it.

Anyway, that's tomorrow's news, but one senses the outlook for capital expenditure won't be all that great, and the recovery in all likelihood has a long way to run.

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Government debt and the capex black hole: Pete Wargent

(huge h/t to whichever internet wag created the above graphic - it gets me every time...too funny).

Some Treasury forecasts...

As new resources projects come online, Treasury expects the Australian economy to keep growing at a solid clip, in part driven by increasing export volumes, particularly of LNG.
 
Government debt and the capex black hole: Pete Wargent
 
Treasury has maintained its positive forecasts for real GDP growth over the next few years, with economic growth to be aided by household consumption and net exports as the export volumes increase.
 
Government debt and the capex black hole: Pete Wargent
 
However, these forecasts somewhat optimistically assume that household consumption will continue to remain positive, with the terms of trade holding also up at a level above anything we saw prior to the start of the boom (rather questionable given the trend since 2012!). Coking coal prices are booming - up by more than 40 per cent in August - but the outlook for iron ore prices may be grim.

Government debt and the capex black hole: Pete Wargent

Tourism and education exports are also expected to be key contributors, a theme I've looked at quite a bit on this blog.

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Government debt and the capex black hole: Pete Wargent

 
Government borrowing
 
While the government is making noises about trimming dollars and cents from its budget expenditure, behind the scenes the government is expected to keep borrowing hard, in part for infrastructure projects.

There are now $397 billion of Treasury bond securities across 23 lines on issue - a dozen of which have more at least A$20 billion outstanding - but look how low some of those coupon rates are...

Government debt and the capex black hole: Pete Wargent

There are a further $30.6 billion of Treasury indexed bonds and $3.5 billion of Treasury notes, adding up to a total of $431.2 billion of government securities on issue. 
 
Fortunately bond yields are so low that the government can borrow at around the lowest yields on record without adding unduly to the interest burden.
 
Government debt and the capex black hole: Pete Wargent
 
And government bonds on issue are expected to keep rising, with there having been strong inflows from Japan into Australia's debt securities over the last three years.
 
Gross issuance of Treasury Bonds is expected to be A$90 billion in 2016-17, up marginally from last year, with net issuance of $68.9 billion (and an additional $3 billion of net issuance in Treasury Notes).
 
Government debt and the capex black hole: Pete Wargent
 
 
That will take Australian government bonds on issue to well beyond 25 per cent of GDP (though Australia's net debt to GDP ratio is somewhat lower) - which is not really very high compared to other deficit countries - e.g. Japan, Canada, the United States, Greece, France, or the United Kingdom - but nevertheless moving in an unmistakeably northwards direction since the financial crisis took hold. 
 
How you feel about that really depends upon your position. Some argue that it's borrowing from the future. Others maintain that it makes a lot of sense to borrow for infrastructure projects when bond yields and coupon rates are so low, and while mining investment is still in freefall. 
 

PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His latest book is Four Green Houses and a Red Hotel.

Pete Wargent

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.

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Unemployment Capital Expenditure

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