Judith Sloan takes issue with me… and the bogeyman in the cupboard

 

Columnist for The Australian, Judith Sloan, takes me to task on the issue of Australia’s government debt in her latest column – http://www.theaustralian.com.au/opinion/columnists/labors-story-on-debt-misses-one-crucial-point/story-fnbkvnk7-1226613585777 .

Ms Sloan concludes that “the public have every right to feel nervous about public debt”, even though for her previous 2,000 words or so, she fails to mention a number of critical items that render her opinion not only misguided but patently wrong.

Sloan fails to mention in her piece the actual indicators which determine whether a particular level of government debt is a problem or not. These indicators are not opinion or a hunch or a doctrinal Tea Party like fear but simple and observable benchmarks.

Perhaps most important of all of these is the level of government bond yields, or the interest rate that a government pays on its debt. This is a good benchmark on which to judge whether or not government debt is something to be nervous about. In simple terms, if there is too much debt, yields are high. If bond yields are low and the bond market is free of government intervention, there is no fear about government debt.

The Australian 10 year government bond yield is currently around 3.3%, marginally above the record low reached in the middle of 2012. In the last 50 years, there have been only a few months, all of them in the last year, where yields have been lower than they are today. No nervousness here.

In late 2007, the 10 year government yield was above 6%, when there was no net debt. Investors now are flocking to buy Australian bonds, in full knowledge that they are a great, very low risk investment. Indeed, some investors suggest that Government debt is so low that bonds are in short supply.

If you think the bond yield is not a good proxy for whether government debt is sustainable, let’s quickly look to Italy and Spain, for example, where yields skyrocketed to 6 and 7% before the market calming influence of the European Central Bank was evident. In Greece, yields on 2 year government bonds exceeded 100% before the partial default and bail out funds arrived. Look also at Argentina over a decade ago and many other countries where high government debt has been a genuine problem.

It is also worthy of note that between 75 and 80% of Australia’s $230 billion bond market is held by foreigners . They are not obliged to hold these bonds but do so for reasons of security, financial safety and return. Nervous about government debt? I don’t think so.

Which bring us to the next point Sloan ignores in her fear campaign – Australia’s credit rating.

In November 2011, Fitch Ratings upgraded Australia’s sovereign credit rating to AAA. This meant for the first time, all three ratings agencies, the others being Moody’s and Standard & Poors, rated Australia triple-A. It didn’t happen when Australia had no net debt, never happened when there were budget surpluses, but it happened in 2011 AFTER the move to budget deficit, after it was clear net government debt was inching up and after, unfortunately for Sloan, around 200,000 jobs had been protected from the fiscal stimulus measures a couple of years earlier.

I just want to emphasise – the upgrade from Fitch was in November 2011 when the budget was in deficit. In delivering the upgrade, the first item Fitch noted was “low public debt”. Policy flexibly was also seen as a vitally important aspect of Australia’s low sovereign risk.

Having seen the recent budget numbers and debt levels, Fitch and the other ratings agencies have all retained the triple-A rating, not that Sloan would want that inconvenient fact to get in the way of a good scare story.

Another issue ignored by Sloan, which makes her nervousness about government debt a bit like a 5 year old worried about the bogeyman in the cupboard, is the fact that the Australian dollar is trading at a 28 year high. In an open economy like Australia, any concerns about government debt would show up rather quickly in a currency flight. Rather than a currency flight, there is a flood of global investor money cascading into Australia at a great rate of knots even though commodity prices and the terms of trade are falling. Indeed, the RBA reckons there is too much good news that has lead the Australian dollar to be overvalued.

I thought it also useful to point out where Sloan is befuddled with nominal dollar amounts for government spending and tax and mixing them with measures as a share of GDP. She cites dollar values for a number of items to make then appear big (whoa! An extra $72 billion of government receipts is a lot!) and then looks back in history to note some items as a share of GDP (yikes! Government spending hit 26% of GDP in 2009-10).

A classic apple and oranges exercise, although Sloan seems happy to make a fruit salad out of her ‘analysis’.

The latest Australian numbers show that government spending as a percent of GDP will be 23.8% in 2012-13. Yes, it was 26.0% of GDP in 2009-10 as the stimulus measures kicked in but only three times in the past 20 years has this ratio been lower than the 2012-13 level. So much for Sloan’s confected concern about government spending. I should add too, that this level of government spending is being delivered with the biggest ever cut in real government outlays in 2012-13, another fact Sloan is not aware of or chooses to ignore.

Sloan also chooses to muddy the waters, mixing gross and net debt concepts – a popular trick to get people really scared about debt, and then implies that Australia is at risk of replicating the economic crisis of Ireland where debt, according to Sloan’s numbers, rose from 20% of GDP to nearly 100% (the numbers are actually, according to the IMF, from a low of 12% in 2007 to 110% in 2013).

I am not sure what motivated Ms Sloan to write her diatribe. Who knows, she might actually be nervous about Australia’s level of government debt. If she is, she is in sharing that space with the Tea Party nutters who also are probably nervous about the sky falling in sometime soon.