Debt crisis? Truth is, there isn't one    

Date
    August 17, 2013
    The Age.

The expression making a mountain out of a molehill could have been invented for the debate about government debt in Australia.      

    So the basic fact is this: 

We hear debt is out of control and future generations will be burdened with paying it off. Rubbish.      

When the secretaries of Treasury and the Department of Finance sign off on the independent Pre-Election Economic and Fiscal Outlook (PEFO) as reflecting their officers' best professional judgment on the budget, one thing they do is model projections for the next 10 years. The results are in startling contrast to debt alarmism.


Pages 60 and 61 of the PEFO released this week illustrate two scenarios in the absence of policy changes. One accepts the 2013-14 budget assumptions by limiting real growth in payments to 2 per cent a year (which history suggests is a heroic assumption) and capping tax revenue at 23.7 per cent of gross domestic product (lower than all but one year of the period 2000-07). The other no-policy-change scenario allows rises in spending with demand and in taxes with growth in profits and incomes.

What happens?

In the first scenario, the underlying cash surplus grows rapidly beyond the forward estimates. ''Net debt is projected to return to zero in 2023-24.'' In the second scenario - in which ''spending grows in line with the demand for existing functions and if the taxation system is unchanged'' - payments growth rises to an average of 3.5 per cent a year and the tax take hits 25.5 per cent of GDP (exceeding the records of 2004-06). The result? ''Net debt would be slightly above zero in 2023-24.''

Such projections cannot be exact, but are more reliable than much of the public commentary on debt. One chart doing the rounds shows the proportion of debt accumulated by Australia from 2011 to 2014 as greater than for all OECD nations but Spain and Slovenia. Writing in The Australian Financial Review, former Howard government minister Alexander Downer cited this as proof the Rudd government has lost control of debt.

What does the table really show? And how does Australia's debt truly compare?

The first question to ask about any percentage change is this: what was the starting point? The chart purporting to show the ''facts'' on debt is a classic example of why this matters.

Every other country on the chart has a debt that, relative to the size of their economies, is much bigger than Australia's. The apparently rapid growth in Australian debt is a result of its low starting point.

As a simple illustration, which would you prefer: a 100 per cent increase in a $1 debt, or a 10 per cent increase in a $100 debt? The first will cost you $1, the second $10. No contest.

Or consider two debtors. The figures are drawn from the OECD Outlook No. 93, published in June. One, let's call her Ms Australia, has gross debts equal to 33.8 per cent of national income by 2014, the other, Mr Greece, owes 189.2 per cent. But Mr Greece started in 2011 with a debt of 178.9 per cent and Australia began with 27.1 per cent.

Voila! You have a chart that makes Australia's debt growth look much worse. But, again, which debt would you prefer to have?

Government income is tied to the size and growth of the economy, usually expressed as gross domestic product. And when we convert the debt growth shown in the chart to GDP terms, the picture looks very different. The 2011-14 debt growth is as follows: Slovenia 23.9 per cent of GDP, Spain 26.4 per cent, the UK 12.6 per cent, Greece 10.3 per cent, total OECD 9.6 per cent and the United States 8.1 per cent. Australia's increase is 6.7 per cent.

By 2014, every other country on the chart has a debt-to-GDP ratio between 1.25 and 5.6 times as big as Australia's. The chart's ''best'' performers, Germany and Switzerland, are cutting debt but, relative to GDP, still owe significantly more than Australia does. Commonwealth debt is equal to about 10 months' revenue - most mortgage holders can only dream of such a burden.

The chart seems to have its origins in an article in The Australian Financial Review by economist and former Reserve Bank board member Warwick McKibbin. He presents data for all OECD nations and also notes Australia's gross government debt is the third-smallest, after Luxembourg and Estonia, and much lower than the rest. ''The problem is not that Australia currently has a debt problem,'' he acknowledges, but ''it has a problem with the nature of spending and taxation''.

McKibbin's legitimate concern is that if current imbalances are not corrected and debt-based funding is not invested productively, we could develop a debt problem.

So the basic fact, which is well documented, is this: Australian government debt is low and is not out of control.

The picture looks even better when one realises the OECD figures are for general government debt. Other tiers of government owe about 40 per cent of our debt, so the Commonwealth's share equals 20 per cent of GDP.

But wait, there's more. The OECD figures are for gross debt. As any borrower and any lender should know, debt is assessed against

depose the upper middle class dictatorship, replace through working class struggle - problem solved...

Maqqa wrote on Aug 17^th, 2013 at 2:56pm:

Gratifying, isn't it?

Some of us, however, remember things like the dearth of infrastructure spending - and, of course, the Global Financial Crisis. On the latter, Abbott showed that he'd have wimped out. Rudd showed that he had the guts to spend a bit to save a lot. It wasn't pretty - things done in haste tend to be like that - but it seems to have worked. Had Abbott been PM, we'd have suffered.

While I'm at it, here's the rest of that article, from http://www.watoday.com.au/comment/debt-crisis-truth-is-there-isnt-one-20130816-2...:
Quote:

Debt under LIBs = ZERO

Debt under ALP = $300B

# wrote on Aug 17^th, 2013 at 3:21pm:


So you keep saying - that was 2009

We are spending more now than we did during the GFC

Rates are lower now than they were under the GFC

Labor buggered up

I remember when Spain was the envy of Europe too  , all it takes is a few left wing idiots and thats the end of it 

# wrote on Aug 17^th, 2013 at 4:04pm:


the dishonesty is in thinking that because we are better than everyone else that it is still good.  That is the stupidity of relativistic thinking.  I did not that you failed to answer the report that australias INCREASE in debt is the third fastest in the world.

longweekend58 wrote on Aug 17^th, 2013 at 3:52pm:

Quote:


longweekend58 wrote on Aug 17^th, 2013 at 3:52pm:

Quote: