Government debt – facts versus fiction



Last week, I wrote an article on the issue of Australia’s government debt which the Labor Party distributed via its email distribution list**.  The article is here http://campaigniq.communityengine.com/em/mail/view.php?id=1792973170&a=26848&k=8c5f3b1#facebook

I am eager for the discussion and debate concerning government debt to be elevated as there is a general misunderstanding of the issue in political circles, much of the media and the general public. This confusion threatens to unnecessarily undermine domestic confidence and global investor risk assessment when they decide whether or not to have investment funds in the Australian bond market. If the email sent by Labor has elevated the facts surrounding the issue of government debt, it has been worth it.

There was a rush of feedback on the topic and some sensible questions were raised, in particular the discussion of what the optimal level of net government debt is.

The answer to that question must be answered in some medium term context. There can be no hard and fast target for net debt that should be met each and every year. Rather, the optimal level for net government debt is dependent on the business cycle.

It is not unlike asking a company what its optimal level of debt is. If economic conditions are slow, a company would want lower debt. If there are opportunities for expansion, takeovers or if sales are strong, ramping up debt is entirely prudent as the firm aims to take advantage of favourable news. In other words, the optimal level of debt for a firm or government depends on economic conditions.

For the government, in a climate of a sustained and strong economic growth, net debt should be falling and low. The longer a strong expansion is sustained, the greater the move should be towards negative net debt (and the accumulation of financial assets) as was the case during the late 1980s and early 1990s under Hawke and Keating and during the period up to 2007-08 under the Howard government.

If in the current cycle, the economy sustains nominal GDP growth around 5.5 to 6 per cent over the next four or five years, net government debt should be eliminated by about 2017, give or take a year.

If on the other hand, the economy is less strong, or worse is subjected to a huge negative shock such as a global banking and financial crisis or a negative terms of trade shock, there are grounds for net debt to rise or at least for the path to debt reduction to be long and slow. This was certainly the approach with the Fraser government in the late 1970s/early 1980s, the Keating government as it tackled the early 1990s global recession and of course the Rudd/Gillard government as it fought to hold back the tide from the GFC.

Most of these examples show counter-cyclical fiscal policy in play and the governments undertaking such an approach did well.

Whatever the current argument, the level of net government debt has not exceeded 20 per cent of GDP in the last 45 years, a remarkable achievement given the levels of debt around the industrialised world right now.

The day after the article was published, Fitch ratings agency confirmed Australia’s triple-A rating and it cited low public debt as one of the reasons for the confirmation of this rolled gold assessment of the Australian economy.

It is an important side note that the US government has not had net debt below Australia’s current level of 10 per cent of GDP since 1915. Yet its economy over those 100 years have been remarkably strong, delivering massive riches to the bulk of its population, notwithstanding the government debt explosion unleashed a decade ago.

There is an even greater misunderstanding in terms of gross government debt, which is effectively the amount of government bonds on issue.

I have written on this in the past – here http://www.businessspectator.com.au/article/2012/11/2/interest-rates/why-government-debt-must-grow-forever  .

Clearly, for the purposes of market liquidity, a benchmark bond from which corporate and other bonds are priced and an underpinning of the futures market, gross debt is and will be an inevitable market factor for decades to come. Indeed, Australia has had gross debt year in, year out ever since Federation in 1901 and the level of that debt has never posed management problems.

If Australia’s government debt level is a top tier economic problem for Australia, it confirms just how well the economy is going. To focus on it is like highlighting Don Bradman’s duck in his last innings and ignoring the rest of his career. Context is important.

Let’s hope than in the remaining five months before the 14 September election that the economic policy debate steps up well above the issue of government debt.

If the Greens, Nationals, Liberals or Independents want to talk to me about sending economic material to their email lists, under my name, I would consider it. If it is an issue I feel strongly about and on which I have knowledge, I would be delighted to help.

The economic debate not just in the next five months but for years to come needs to focus on productivity, education, the ever shrinking tax base, getting the unemployment rate towards 4 or even 3 per cent on a sustained basis, training, skills development, workforce participation and the like. I hope we see these issues elevated in the months ahead.


**  Disclosure. I am not a member of the Labor Party or any other political party for that matter. I did not receive any payment for the article sent out by the Labor Party and since I established my consultancy business, Market Economics in late 2011, I have received exactly the same fees for work from the Liberal Party as I have from the Labor Party.


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Zero government net debt and budget surplus drivel


There have been only two governments over the past four decades that have presided over zero net government debt and Budget surpluses in the majority of their time in office – they were the governments of Gough Whitlam and John Howard.

The Whitlam government ran budget surpluses in 1972-73, 1973-74 and 1974-75 and only in 1975-76 was there a deficit; whilst at the same time, there was zero (or rather negative) net government debt in 1972-73 which ran right through to 1975-76. Only in 1976-77 with a new government did net debt turn positive.

The Howard government of course ran budget surpluses for the bulk of its time in power and managed to eliminate net government debt in 2005-06. Only in 2009-10 did net debt turn positive after there was a change in government.

These facts are largely meaningless drivel and highlight the absurd discussion at the moment about budget surplus, government debt and the debt ceiling. It also goes to show that budget surpluses and the level of net government debt are NOT the benchmarks on which economic management should be judged.

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Julia Gillard: 1,000 days and now 15th longest serving PM


Julia Gillard is now Australia’s 15th longest serving Prime Minister and today marks her 1,000th day in the top job. Australia has had 27 Prime Ministers since Federation.

In terms of duration, she has just overtaken Australia’s first Prime Minister, Edmund Barton having overtaken the beleaguered Kevin Rudd in January.

In June, Ms Gillard will overtake Gough Whitlam and move to number 14 and when the election campaign is in full flight in August, she will then overtake John Gorton to move to number 13.

It is interesting to note that only 7 Prime Minister’s have served more than 5 years, while 6 didn’t even make 1 year.

The top three Prime Ministers, in terms of time in office, were Robert Menzies (18 years, 160 days); John Howard (11 years, 267 days) and Bob Hawke (8 years, 284 days).


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The following article originally appeared in the March edition of the Melbourne Review.



If the electorate focuses on the economy as it votes at the Federal election on September 14, the Labor Party should win.

An era of rising wealth, sustained solid growth, near full employment and on-going lift in living standards are the material that should get an incumbent reelected.

While it is political poison to say to the general population, “you’ve never had it so good”, the cold, hard macroeconomic facts on the economy, real wages growth, wealth and incomes suggests Australians have never been richer, never been better off.

At a macroeconomic level, the economy grew by a healthy 3.1 percent through 2012, while annual inflation ended the year at 2.2 percent, in the lower half of the Reserve Bank’s target band. Right through 2012, the unemployment rate was low, holding between 5 and 5.5 percent which in fact locks in a decade where Australia’s unemployment rate has been below 6 percent. This is a remarkable achievement given global events, the near depression in the developed world and the substantial structural changes that have occurred in the local economy.

While there is nothing particularly spectacular about 3.1 percent GDP growth, 2.2 percent inflation or the unemployment holding at 5.5 percent or below, to have them occurring simultaneously is rare.

Australia’s economic history has many examples where GDP growth has been well above 3 percent, but this has normally seen inflation rise, which eats away at real incomes and forces interest rates higher. Similarly, there are many episodes where the annual inflation rate has been 2.2 percent or lower, but this has usually occurred when the unemployment rate is high and rising. To have this trifecta of excellent macroeconomic news owes a lot to the economic management of the economy and is something that is overlooked by an electorate that seems to be preoccupied with boat people, the marginal hip-pocket impact of the carbon price, the trivial levels of government debt and other ephemeral issues.

Looked at another way, there is absolutely no doubt whatsoever that whoever wins the election in September, they would be delighted to lock in a further three years where the macroeconomic numbers we have before us now are repeated each and every year of their term of office.

Frankly, it is just about impossible to do any better.

Having said that, it is clear that not everyone is sharing the benefits of the purple patch for the Australian economy. There are regions, industries and individuals that are not sharing the good times that the strong economy is delivering.

Such unevenness is inevitable whether the economy is strong or weak, but it is important to emphasise that it is not the job of the RBA to set interest rates for Tasmania or manufacturing, for example, or for the government to spend too much money propping up industries that are succumbing to the reality of extinction due to high costs, inefficiency or some other factor outside the government control.

Where the government can and should help, and this is where the current government has done well, is to provide a framework that provides a safety net for the sectors, businesses and individuals who are hurting as the rest of the economy powers ahead.

The mining tax raised revenue to boost superannuation for those not directly involved in the boom sectors. Retraining, skills and even some financial support is allocated to individuals who lose their jobs as the sectors they work in shrink. Maintaining a strong overall economy will also see job opportunities show up in the sectors in the fast lane expand.

For all of the thousands of jobs lost in recent years in Qantas, Boral, the banks, the steel and aluminum firms, Santos, Holden, Toyota and Caltex, to name a few, there are 850,000 more people employed today than there were five years ago. Presumably the bulk of the people who were proverbially “thrown on to the unemployment scrap heap” have been re-engaged elsewhere in the workforce.

On an individual level, the recent sharp rise in share prices and the resumption of what appears to be solid growth in house prices is good news for the bulk of the electorate. From the low point in 2012, the market value of the ASX 200 stock index has risen by close to $350 billion, including dividends, which will be a nice boost to retirees and those with a superannuation fund.

The rise in house prices has added around $125 billion to the wealth of residential property holders in the last three months alone. This should be pleasing to the two-thirds of the population that own a house.

Having a job, rising wealth and rising real wages is good news and cannot be due to simple dumb luck. Generally prudent monetary policy and use of fiscal policy in a counter-cyclical way has underpinned the current economic strength.

The polls are showing that the Coalition will romp in at the election in September, even though the mix of hard economic news has rarely, if ever, been better.

Stephen Koukoulas is Managing Director of Market Economics. He writes a daily column for Business Spectator.


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Mr Abbott as an economic forecaster


In his Budget reply speech in May last year, Mr Abbott made the following claim:

  • “Madam Deputy Speaker, from an economic perspective, the worst aspect of this year’s budget is that there is no plan for economic growth; nothing whatsoever to promote investment or employment.”

Since that speech was delivered, this has what has happened to growth, investment and jobs:

  • The economy (real GDP) has grown by 1.9% in the three quarters to December 2012. This is an annualised increase of 2.5%.
  • Private sector business investment has risen by 2.5% in the three quarters to December 2012 to be a thumping 70.0% higher than the  level of investment when the Coalition was last in office. The capital expenditure expectations data were, according to Westpac, “robust” with investment likely to rise a stunning 11% in 2013-14 to fresh record highs.
  • Since June 2012, 53,400 jobs have been created, 30,000 of these full-time positions.

Just sayin’.


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