Credit downgrade is not good for our superannuation funds

Ross Greenwood talks to Stephen Anthony, the chief economist of Industry Super Australia, about budget repair

Credit Rating Downgrade?

Ross Greenwood: Welcome back to Work, Life, Money right around Australia. I want to take you in to a little bit more of the budget analysis. Not just what happened a week or so ago but also what happens over the next 10 and 15 years in Australia. The reason for that is well, let’s be honest about this.

If Australia continues to dust its problems under the carpet, we know that the ratings agencies, and I’ve spoken to most of the major ratings agencies since the budget came out. They basically say Australia right now is on a fairly short leash in regards to its credit rating. You’ve seen even this week that China has had its credit rating downgraded.

The issue is whether political parties, and doesn’t matter which political party you’re talking about. All political parties and even the political process itself allows Australia to be in a position to be able to allow us to afford the things we want long term. Because do bear in mind if ever we’d find ourselves disrupted from an event overseas, a global financial crisis type event, we’re not now in the same position we once were.

Now we’ve got some choices, we can borrow more money, but that only digs the hole deeper. We can try and make big cuts that hurts the community. There are choices that need to made long term. I thought what I’d try and do is get the chief economist of Industry’s Super on the line, Stephen Anthony who is with me now. Many thanks for your time Stephen as always.

Interview with Stephen Anthony

Stephen Anthony: Yes, thanks Ross for the opportunity.

Ross: All right, let’s just take our way through this. The way that Australia speaking to say Standard and Poor(S&P) global ratings they say, “If there’s deviation from this promise to get the budget back into surplus by 2021, then ultimately Australia loses its AAA credit rating.” That is, if you like, the beginning of a downward spiral potentially. But it’s not easy, the political choices, even the community choices are not easy, are they?

Stephen: No, although the strategy would be to spread the pain of the adjustment, right? We know that the basic problem is that spending growth over the outlook and especially into the next decade, it is growing faster than our received growth.

At the moment, what’s hiding that gap very optimistic assumptions future growth but we think realistically, that there is a gap so it’s a structural deficit in the budget. The way to address that gap is to deal with it directly and to curb the growth of future spending so that it comes closer to likely future receipts.

Ross: That’s a big call though, because there’s only a couple of ways you can do that. Number one, cutting spending. Given the fact that the vast majority of taxpayer money that’s spent in Australia is either on welfare, or on health. Both of which will hurt those people in the lower income demographics. Those people who are vulnerable and don’t necessarily have the savings, the superannuation built up to be able to, if you like, act as a bit of a buffer. That’s your fundamental problem and because of our aging population, there are more and more of them every year and every decade.

Stephen: Yes. The end game here is either we make this adjustment now, or have it forced upon us at exactly the worst time. I guess, the idea what I think we’d all agree together to deal with this problem before it gets out of hand. The way to deal with it is uber means testing.

Those who can provide for themselves should nobody in the so-called middle class, earning household income say above 120,000 or some appropriate level should be receiving any government benefit at all. Obviously, we may have to look at retirees who are currently in a preferred tax position relative to younger Australians and ask are they bearing enough of the burden?

Ross: These are one of the interesting sides about this that your arguments are you can cut your spending which means you can stop giving handouts to a group of people in our community, but you know that they will vote and they will be vocal. You can also raise your taxes. Again, that’s going to largely hit people who are in the higher income brackets.

Again, you’re going to get a very vocal and very political response. You’re quite right to say that we’re kind of stuck. Australia is really quite stuck. Yes, we tinker around the edges, but it’s almost isn’t until we are pressed into that corner, that you are going to get the type of responses that you’re talking about here.

Stephen: Yes, we’ve already accumulated the amount of debt over 10 years since the GFC. We’ve got a structural deficit that are about two percentage point of GDP and this is before we paid for the tax cuts that the government passed that are worth about $15 billion. This is before we paid for the explosion, the national visibility insurance gain, the future submarine, population aging up in the generational-

Ross: New airport in Sydney, all that type of things.

Stephen: Et cetera, et cetera. Basically Ross, we’re looking at a sea of debt deficits as far as the eye can see. We have a choice. We can eliminate this deficit now while times are still reasonably good, and hope that that shores up our economy and basically since the right signal to international investors that we’re open for business rather than doing counter-intuitive things which were done in the budget like a bank levy. Things that just add to sovereign risk quite frankly.

Ross: Because the thing is, Australia needs to remain competitive. A lot of people would point to our tax rates, are not necessarily competitive with many of our new competitors. We’ve got be able to trade that means we’ve got to have a relatively open economy where we can have goods and services flowing in and out of the country.

You do need the growth if you can get the economic growth, then obviously some of your problems go away but the structural nature of the spending inside the budget. That is because of the aging population on the health and on the welfare and on the pensions is not going to disappear anytime soon.

Stephen: Exactly. We desperately need tax reform. We desperately need energy reform. We need to be a competitive low cost electricity generator, and we need the budget back into balance. If we can combine those three things we say we stay very competitive. We can build the economy or the future around that and hopefully preserve what we already have in terms of heavy manufacturing related jobs.

Ross: There’s one other aspect about this. I know there was a big report out this week by Industry Super in regards to fund performance over the longer term. Because if you have an economy that’s settled with debt, the economic growth rates start to slow. If they start to slow, that means also that superannuation fund performance of all types will also start to slow as well, which means that the outcomes for the individuals will not be as prosperous.That is a fundamental issue, because clearly, it is performance that is the key driver of the amount of superannuation that an individual will finish up with at the end their working life.

Stephen: Exactly. Ross, what we’ve found is that this is a vicious circle. If we have a high graph economy, high returns super sector, if there’s real infrastructure, there’s a real property investment, it helps to grow the economy both here and overseas and create a virtual circle of growth. Of course the opposite applies if we go into the lowest common denominator in terms of policy.

Ross: But it also means that individuals are going to be pretty active with those super funds as well to make certain that they are not necessarily in a leg out fund, because if that’s the case, they could find that their ultimate return or the pot of money that they have would be potentially less than what it could have been had they found themselves a larger fund that would have been performing better for them for example.

Stephen: Yes. If people were concerned about this, they can look at the recent ISA research that you’re referring to and identify the top fund performers over the last decade or so and when they do, make sure that, when they’re talking about default superannuation or any other super vehicle, that their returns stack up against those top performers.

Ross: I tell you, good to have you in the program. The chief economist of Industry Super, Stephen Anthony, with the fundamental problem that Australia’s economy but also the people who live within it are going to face over the next 20 and 30 years, unless something is really done in the very short term. Stephen, as always, we appreciate your time.

Stephen: Thanks so much, Ross. I really appreciate the opportunity.

Ross: Make more of your retirement income with Australia’s biggest and most trusted super fund. Visit

Listen and Read to other interviews by Ross Greenwood on Superannaution.

24-07-2017 Interview of  Kelly O’Dwyer, Minister for Revenue and Financial Services titled ” Super overhaul ”.

10-07-2017 Interview of  Mark Delaney, Deputy Chief Executive, Australian Super titled ” Australian Super returns ”.

10-07-2017 Interview of  Kelly O’Dwyer, Minister for Revenue and Financial Services titled ” Efficiency and Competitiveness of Superannuation – Kelly O’Dwyer ”.

03-07-2017 Interview of  Robert Deutsch, Senior Tax Council,  Tax Institute titled ” The new world of superannuation ”.

29-06-2017 Interview of  Warren Chant, Director, Chant West titled ” Superannuation funds to return 10.5% ”.

19-06-2017 Interview of  Michael Rice, CEO Rice Warner titled ” Superannuation changes from July 1 2017 ”.

12-06-2017 Interview of  Peter Kell, Deputy Chairman ASIC titled ” Dangers of SMSF’s pushing people to buy property ”.

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