Below is the link to the discussion I had with Ms Sloan on Lateline last Friday. The transcript is below.
EMMA ALBERICI, PRESENTER: Depending on who you listen to, Australia’s economy is either in great shape or facing serious problems arising from the public debt that’s building up to pay for Government’s spending.
Earlier this month, economist Stephen Koukoulas wrote a piece defending the Treasurer’s debt position. He complained about the nature of the economic debate in Australia and called for an end to what he argued was the spread of misinformation about the country’s financial health.
Fellow economist Judith Sloan published a response attacking both Mr Koukoulas and Wayne Swan. She claims that Australians have every right to feel nervous about government debt. Who is right? We’ll let you be the judge.
We were joined a short time ago about Stephen Koukoulas in Canberra and Judith Sloan in Melbourne.
Welcome to you both.
STEPHEN KOUKOULAS, MANAGING DIRECTOR, MARKET ECONOMICS: Thank you.
JUDITH SLOAN, CONTRIBUTING ECONOMICS EDITOR, THE AUSTRALIAN: Thank you Emma.
EMMA ALBERICI: Why should the Australian public feel nervous about government debt Judith Sloan?
JUDITH SLOAN: I think they do. I think it is right that they do. I’m sure Stephen will make the point by international standards the Australian Government debt is very low. That’s true. Do we really want to be in the basket case positions of a lot of those European countries. I think what probably unnerves them the most is the rate of change. When the Labor Government came to power there was actually not any debt. There was a negative four per cent if you see my point. There’s actually been a change of 14 percentage points into debt and that’s actually a very rapid movement. So yes, by international standards our debt is low, but in terms of rate of change, we’ve got the gold medal.
EMMA ALBERICI: Stephen, you’ve said you’re sick of the misinformation campaign, as you call it. Tell us where you think the debate has gone off the rails?
STEPHEN KOUKOULAS: It’s gone off the rails because there’s the foe focus generally on that rate of deterioration, to use Judith’s words in a level of government debt. It is interesting in that period when we’ve gone from financial assets of minus four per cent to around about 10 per cent now, it’s been the very time the rating agencies have upgraded Australia and locked in that AAA from all three rating agencies. So they don’t have any fear.
I also would notice that the bond market, the government bond market, that is, the interest rate and the level of government debt by definition that we’re talking about, the yields there are stunningly low. They’re near historical lows and the difference between our yields and those in the US for example or in Europe are not much wider than they normally with are.
So from the perspective of does it matter where is it showing up in this concern, I can’t see where it is showing up anywhere in the financial markets, I can’t see it showing up anywhere in the real economy. If it was a problem like it is in Greece or Italy, you would be in deep recession. You’d have massive austerity programs and we’re nowhere near that at the moment.
EMMA ALBERICI: Judith Sloan you don’t give the government any credit for keeping Australia out of recession for the past five and a half years. Why not?
JUDITH SLOAN: I’m not sure that’s true. I think they definitely spent too much and they wasted money. Whenever a government spends money where the costs are greater than the benefits we must be worse off. I think there was way too little attention paid to the quality of the spend. I think whoever had been in Government at the time the GFC hit they would have done something. I think probably the cash handout was what they would have done. They would have supported the banks through the deposit guarantees and the like.
I think my criticism goes beyond that. It then became a point this is quite enjoyable for a Labor government. This was pressing the right kind of buttons. So they could end up I think spending a lot of money wastefully because it was actually quite in keeping with their sort of political tendency anyway.
EMMA ALBERICI: Where the waste, or was the waste in your view?
JUDITH SLOAN: Of course, you know, they were just all over the place. The building education revolution, which was I think a very unfortunate name, we were spending way too much. The value for money was appalling. The home insulation program was a disaster and they had to cut that off. They had to kill that off.
You know let me be upfront. I’m not much of a Keynesian. I’m a great believer that this needed to get sorted out. I don’t believe in this that a government should do whatever it can to keep an economy out of recession. David, one of the executive directors of the Treasury made the point and I think he’s completely wrong. There comes a point when a recession, hopefully a mild one, actually can be quite useful and that’s what should have been allowed to be done
EMMA ALBERICI: Stephen?
STEPHEN KOUKOULAS: Oh look I’m all for avoiding recession at all costs, they’re nasty, they’re hurtful…
EMMA ALBERICI: At all costs?
STEPHEN KOUKOULAS: Well almost, if you can, if you can do it, I’m all for it. Because you just have to look at some of the information that’s coming out of the Lancet, did a survey and an analysis of the health implications of the austerity measures in a number of countries in Europe and suicide rates are up, they’re very high, 25 per cent plus unemployment rate in Greece and Spain are really hurting people, not just because they’re unemployed but there are health consequences.
I am a Keynesian and I think that the issue that we’ve got to remember in all of this and the wasteful spending which is a definition I would never use, it did keep the economy out of recession. It did cause the economy to grow. The interesting thing now about this wasteful spending is that I’m sure on Tuesday the 14th, we see the budget numbers, the share of GDP that’s accounted for by government spending will be below the average of last 25 or 30 years.
Government spending is not the problem at the moment. It is the fact we’ve got low inflation, that the terms of trade are trending lower, commodity prices are down, and the Australian dollar is very strong. We’re not seeing the automatic stabilisers kicking when the economy is doing very well.
And in fact I’m a little bit more worried about the recent softness in the economy the fact that unemployment is drifting up, that economic activity appears to be just cooling off a little bit than I am whether the deficit is going to be $18 billion on budget night.
EMMA ALBERICI: It does seem Judith that part of the debate here is around the measure of a Government’s success. How you actually define a Government’s economic management skills. We have got low unemployment trend growth, a strong investment pipeline, inflation is contained and we’ve got low interest rates. Doesn’t that demonstrate to you some level of competence in this Government’s management of the economy?
JUDITH SLOAN: Why the hell would we have been running deficits in the last three years. If it was all so hunky dory.
STEPHEN KOUKOULAS: The deficits have caused those good outcomes Judith.
JUDITH SLOAN: No, no, no, no they haven’t.
STEPHEN KOUKOULAS: You’re look at it the wrong way around.
JUDITH SLOAN: No, no, they’re violating the Treasurer’s own rules which basically he’s telling us they’re going to run surpluses on average over the course of the cycle. There’s absolutely no way this Government is going to do that. Why would they actually set up these rules themselves?
Let me put it another way. Had we not had this debt and bear in mind we’re servicing the gross debt not the net debt – forget the net debt. We’re actually spending in interest what would be the annual expenditure on the National Disability Insurance Scheme. The idea that we’ve loaded up the future taxpayers for who knows what purpose, there is a really big cost at the moment.
EMMA ALBERICI: Stephen Koukoulas?
EMMA ALBERICI: The growth argument one is one that irritates me the most. Because one thing that we’ve got to remember about the Government bond market is that it actually supports capital markets. The Treasury, APRA, Reserve Bank and financial market participants all got together a couple of years ago and decide what should we do with the bond market – that is the level of gross government debt. It will go up every year for the next 20 or 30 years I hope.
Because what we need to support the capital market is a deep and liquid bond market we have Joe Hockey talking about a 50 year bond being issued in Australia – that’s the government borrowing here money for 50 years. He’s suggesting that as far as I can tell to provide some sort of market security there that when there is another crisis or if there is another crisis in one, three, 10, 20 years time, when happens to be the banks have access to government bonds because the Government will repay them.
They’re AAA rated they’re as good as gold. The problem with the Australian level of gross debt now and this is the Basel three requirements for looking after banks in the post GFC world is we don’t have enough debt. Australia is one of two countries, the other one being Singapore, that got special dispensation because they don’t have enough debt to look after the banks and the RBA is guaranteeing the bank deposits. So we’ve got gross debt that’s ridiculously low. The question is what do we do with the bonds that we issue that we don’t need. We should be moving the discussion to the future fund, the sovereign wealth fund and things like that.
EMMA ALBERICI: Judith Sloan, I’ll pick up on something…
JUDITH SLOAN: That’s all rubbish by the way, I mean honestly Stephen c’mon, you know.
EMMA ALBERICI: What’s rubbish?
STEPHEN KOUKOULAS: Which part?
JUDITH SLOAN: This idea that we have to have all these bonds on offer and increase the gross debt. Are you kidding? You must be kidding.
STEPHEN KOUKOULAS: I’ve worked on it. Why is it wrong?
JUDITH SLOAN: The ratings agencies are looking at us and here is the story. We run a very big current account deficit which has to be funded. The ratings agency look at Australia not just in the context of the Government debt, they also look at in terms of private debt and we have lost our AAA credit rating in the past. It is very hard to get back. We’re basically been put on some kind of warning.
EMMA ALBERICI: From what I can tell we haven’t been put on any warning at all…
JUDITH SLOAN: That’s not true.
EMMA ALBERICI: In fact all three credit rating agency have reaffirmed that AAA status…
JUDITH SLOAN: Read their texts.
EMMA ALBERICI: … after the Treasurer had actually announced that he expected us to go into deficit at the budget.
JUDITH SLOAN: You asked Peter Costello how hard it was and he was a terrific Treasurer, how hard it was to win back the AAA credit rating. You really have to…
STEPHEN KOUKOULAS: He didn’t do it, he did. He didn’t do it with Fitch.
EMMA ALBERICI: This the first time in our history, if I’m not mistaken that all three credit ratings have given us a AAA. Is it not?
JUDITH SLOAN: That’s historically not interesting a thing because they haven’t been actually operating for that long. That’s not saying that much. The truth of the matter once you lose it is hard to get back and, therefore, I think it is very incumbent on this Government because Australia does not look the same as other countries. They do take into account private debt as well.
EMMA ALBERICI: How you can on the one hand suggest that the AAA ratings significant and on the other hand say it doesn’t say much all three have given us the AAA rating for the first time?
JUDITH SLOAN: I’m not saying that. I’m saying the thing to watch you want to keep hold of it and you don’t do that by continuing to spend more than you earn and continuing… I mean it seems to me that what’s going to happen on budget day, so forget the surplus, we’ve all forgotten the surplus, we’re actually going to have budget deficits over the entire forward estimates.
There’s Wayne Swan telling us his budgets rule is that they will run surpluses over the course of the cycle. How long is this cycle? This is going to be a 10 year period including the forwards. In fact 11 and there will not be a surplus in sight.
EMMA ALBERICI: Stephen Koukoulas, did the Government miss an opportunity here given we had historically high terms of trade and sets of numbers that were the envy of the world? Why weren’t we running surplus budgets?
STEPHEN KOUKOULAS: Yes. I think it would have been nice to get the surpluses and up until December the government was still forecasting one. Between December and now obviously we’ve had as we were just mentioning before a softening in the economy. The global economy has weakened. Our terms of trade are still falling. The issue as we’ll find out on Budget night, I can’t guarantee but I’m sure we’ll see it, on the revenue side the spending is not the problem at the moment. It is the fact the government is the lowest taxing government in 30 years, not by design, no, no that’s correct, it is because the economy is weak.
We’ve got low inflation, company profits are subdued, bracket creep doesn’t exist anymore which from the government perspective is bad news. The issue about whether we have a deficit, I’m going to look at the size of these deficits it does matter how big they are, I reckon that he will be one per cent of GDP or less, that’s a trivial puny amount that the rating agencies will look at for about five minutes and reaffirm our credit rating.
Bond yields will stay low. There will be foreign inflows into our economy. If there’s any sniff at all that we’re going to reduce the level of gross debt, Mr Joyce and Mr Robb were true to their word, that we’re going to reduce gross debt, there will be a capital flight out of this country that will just be quite disconcerting as foreigners get out of the bond market while they’re still liquid.
EMMA ALBERICI: Stephen you say this is all about lower tax revenue, but in fact the revenues are up not down. They’re just not up as much as the forecast had suggested they would be.
STEPHEN KOUKOULAS: Yes.
EMMA ALBERICI: So the real problem is the government spending too much isn’t it?
STEPHEN KOUKOULAS: The problem is the Treasurer misread the economy and they’re not collecting the revenue they thought.
JUDITH SLOAN: Come on Stephen. 11 per cent? You’re kidding.
STEPHEN KOUKOULAS: If the government was collecting the same revenue to GDP ratio that was the average, not the peak but the average of the Howard Government we could have a surplus of $15 to $20 billion.
JUDITH SLOAN: So what that’s just a ridiculous thought experiment. They were…
STEPHEN KOUKOULAS: So there’s no taxes coming through.
JUDITH SLOAN: They were forecasting revenue growth over 11 per cent. I can’t believe the commentators were completely sucked in. This was absolutely absurd. They were never going to get to a surplus. There’s even a theory around that they never intended to get to a surplus and now they’re going to have this coming year and into the forwards deficits again.
EMMA ALBERICI: Judith Sloan, Tony Abbott has accused Labor of booby trapping the future by boxing in the next government with big spending commitments is that what they’ve done?
JUDITH SLOAN: I’m not a political expert. But it is certainly true there are going to be some very, very hefty commitments there in the forward estimates. So short of actually changing those commitments, or ditching some very big programs, I think the budgetary challenges for a Coalition Government should they win are absolutely enormous.
EMMA ALBERICI: If the economy is doing so well, why has the Government not been able to capitalise on that? Why have they found it so hard to sell that message?
STEPHEN KOUKOULAS: It is an odd one. The issue at the moment is it that if you were to just look at the cold hard facts on the economy, GDP at three per cent, inflation at 2.5, unemployment at 5.6 per cent, interest rates where they are, I think in three years time if we’ve got those same numbers in place and they’ve averaged that to the level over the next three years, Treasurer Joe Hockey in 2016 would be delighted to see that. The reason why they haven’t sold them so well I think it is the debate has been moved on to carbon pricing and these sorts of things and Rudd being a spoiler in terms of his contribution to the political debate, and people have taken their eye off just how really well our economy is and how somewhere near the perfection the hard numbers on the economy actually are.
EMMA ALBERICI: We’ll have to leave it there. Stephen Koukoulas and Judith Sloan thanks so much for coming in.
STEPHEN KOUKOULAS: Thanks Emma.
JUDITH SLOAN: No problem, Emma.