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Countdown time. With little more than a week to go, the traditional budget leak season is about to get underway.
Each day until next Tuesday, almost every media outlet in the country will deliver a series of scoops and breathless "exclusives" leaked by various government ministers, outlining almost every major initiative in the upcoming federal budget.
But this year has kicked off with an unusual twist: a speech by Treasurer Scott Morrison last week outlining the difference between "good" and "bad" debt.
It's a dramatic shift in thinking for a Coalition government and one that can't be understated. For years, the Coalition has preached that deficits are evil, and the debt that funds those deficits, a disaster. Not any more, it seems.
The sudden about turn tells you one of two things. Either the Federal Government again is having difficulty reining in its deficit targets or, as is more likely, it is worried about the next engine of Australian economic growth.
Why the sudden shift?
The good news that's likely to emanate from this year's budget is that the recent surge in company profits should significantly strengthen the revenue side of the equation — an unexpected turn of events that a politician would grasp as proof of good economic management regardless of truth.
The problem is, as the Treasurer is well aware, the revenue windfall is likely to be temporary.
The most recent numbers, for the December quarter and calculated shortly after the Government's mid-year budget update, showed company profits soaring 20.1 per cent.
Of that, mining made up the biggest component, with a 50 per cent jump that accounted for $9 billion of the $13 billion improvement.
The mid-year update factored in an average iron ore price of just $US65 a tonne for the back half of the year. But prices galloped way ahead of that figure, peaking a month back at around $US94 a tonne.
Unfortunately, commodity prices now are in rapid retreat, last week falling to around the Government's average forecast price.
Even the big miners such as BHP are bracing for significant falls as a big lift in supply coincides with cooling demand.
Hence, the Treasurer's sudden warm embrace of debt.
Budgets, you see, are forward looking statements, and while the performance this year is expected to be way better than forecast last May — the first improvement since the financial crisis — there's not a great deal to look forward to next year.
Why an infrastructure spend is justified
In addition to waning commodity prices, the east coast construction boom that took up the slack when the mining investment boom began to unwind four years ago is now in its final stages.
An even bigger problem is wages. They're now going backwards in real terms, with a 1.9 per cent growth in the December quarter failing to keep up with inflation.
Add to that a household sector that is burdened with one of the world's biggest debt bills, and you have a recipe for long-term anaemic spending.
On top of that, it is now clear that immigration is about to be tightened, which will rob lazy Australian governments of an easy boost to economic growth.
Then, of course, the prospect for a messy unwinding of the Sydney and Melbourne house price boom has regulators and their masters in Canberra in a cold sweat.
Such an event would wreak havoc on the economy and the finance sector despite all the talk of Australia's "unquestionably strong" banks.
That's why the timing for a big infrastructure spend next week is so exquisite.
Armed with what appears to be a stellar budgetary performance this year, Prime Minister Malcolm Turnbull and Mr Morrison are likely to announce a series of "nation building" infrastructure projects.
It'll all be justified by the rapid budgetary improvement in the past 12 months.
Debt — good, bad or indifferent?
Most commentary to date about the Treasurer's speech last week has focused on the difficulty, some say the inanity, of determining exactly which types of debt are good or bad.
But that misses the point. In a backflip worthy of Olympic gold, the Treasurer is signalling that Federal Government expenditure will pick up the slack in the economy next year and beyond because there's precious little ammunition left on the interest rate front.
To pay for it, he's willing to put the bill on the federal credit card. And if that's not an indication of just how challenging our economic future appears, then nothing is.
It is a bold move by the Treasurer and one that will attract political heat.
The tragedy is that it has taken so long for governments — here and around the world — to recognise the problem and how to deal with it.
For years, politicians have left economic management to central banks, where zero and sub-zero rates have distorted asset prices and fuelled inequality while austerity programs have hit those who can least afford it.
For years, our own Reserve Bank has been urging governments to loosen the purse strings, arguing it could no longer shoulder the burden of economic management alone.
Australia largely missed the great recession that debilitated so much of the developed world in the aftermath of the global financial crisis.
We benefitted from a massive increase in Chinese Government stimulus. And developed nations across Europe, the United States and Japan loaded up on state debt to keep the wheels of commerce grinding.
Now it's our turn.
Can government pick infrastructure winners?
There's no doubt we are desperately in need of productivity enhancing infrastructure. Our transport systems are struggling and our cities are choking from a population increase that is about double the OECD average.
The challenge, however, will be, not just in the selection of major projects, but in the execution.
The Turnbull Government already is under fire over a plan to tip $1 billion into providing a rail link to a new Queensland coal precinct that 19 global banks — including Westpac last week — have refused to finance.
When in opposition, the Government was quick to criticise almost every major spending initiative put forth by its predecessors and the bills racked up in the process.
The National Broadband Network (NBN), the pink batts spend and the school halls project have been invariably described as white elephants and fiascos.
Each of them, however, had merit. In each case, it was poor execution that resulted in cost blowouts, controversy and even personal tragedy.
As an aside, it's worth noting that Mr Turnbull, in his previous portfolio as communications minister, managed to keep the NBN alive, albeit in a vastly neutered form, despite a pre-election promise from Tony Abbott that it would be killed as one of his government's first initiatives.
Can a massive infrastructure spend save a nation from recession? It's possible but unlikely. But it will help lessen the pain and, if correctly applied, may improve our competitiveness and productivity.
Farewell AAA credit rating
If there were any doubts about our ability to hang on to a AAA credit rating, however, they are likely to be dashed next week.
Each of the major agencies have warned they want to see a plan to reduce the deficit and to lower debt. Trying to explain that a large chunk of our new debt will be "good" simply won't wash.
The US, the world's biggest economy and the global reserve currency, no longer has a AAA credit rating. It lost it in 2011 when its debt levels began ascending into the stratosphere as it desperately grappled to claw its way out of recession.
If there's one redeeming feature from the Treasurer's landmark debt speech last Thursday, it is that the infantile argument put forth for years by the Coalition about debt and deficits appears to have been junked.
Life in the adult world is far more complex.
Topics: business-economics-and-finance, globalisation---economy, budget, government-and-politics, federal-government, australia