Debt Watch

Fiscal consolidation in the 2010’s will help fight the Coronavirus pandemic.

In 2009-10, the consolidated ‘fiscal balance’ across the Commonwealth and the States and Territories was close to $90 billion (in nominal terms), which amounted to -6.4% of GDP.

The fiscal balance is a better measure of whether a government is running a deficit or surplus than the underlying cash balance (used by the Commonwealth) or the operating balance (used by the state/territories). The fiscal balance (or net lending/borrowing) is the net operating balance less net capital investment. In other words, the fiscal balance includes the impact of infrastructure investment. As such, it better approximates a government’s call on borrowings.

Based on the Final Budget Outcome (Commonwealth) and the various Report on State Finances reports (States/Territories), in 2018-19 the consolidated fiscal balance in the non-financial public sector was -1.8% of GDP (see chart below).

This turnaround in the fiscal balance of 4.6% of GDP in the 2nd decade of this century is remarkable. It has been driven in part by a realisation (post-GFC fiscal response) that governments were approaching their fiscal limits as some states credit ratings were downgraded and many other jurisdictions were put on ‘negative watch’ for a time.

Recent efforts by the Commonwealth Government have driven most of the fiscal consolidation. Indeed, fully two-thirds of the consolidation in the fiscal balance in the non-financial public sector has been driven by the Commonwealth trying to put the budget back into a sustained surplus in the operating balance (see chart below).

Without the significant budget repair work undertaken this decade, Australia would be in a much worse position in terms of responded to the COVID-19 pandemic. If Australia’s fiscal starting point was 2009-10, there would have been every possibility that credit downgrades may have resulted from the necessary fiscal loosening that is currently being undertaken to buttress the last 2 quarters of 2019-20 and the first quarter of 2020-21.