Debt that goes bump in the night

Government-debt-a-phobia is a new anxiety disorder that is reaching epidemic proportions in Australia.

It reached emergency levels last week and over the weekend in the wake of the federal budget which confirmed the fact that Australia has one of the smallest budget deficits in the world, the trajectory to surplus is one of the fastest in the world and amid all of this, Australia has one of the lowest levels of government debt in the world.

Yet some claim government fiscal policy is a “budget emergency”, “chaos” or a “disaster”.

The position of Australian government finances is about a scary as a daddy long legs spider to normal people, but we need to remember that all spiders, however harmless, are very scary for those who suffer from arachnophobia.

Here is what we know about the state of the government’s books. The budget deficit next year is expected to be 1.3 per cent of GDP and two years after that, it will be in surplus. If this profile is correct, and there is no obvious reason to think it isn’t, net government debt will peak at 11.4 per cent of GDP before it starts to drift lower.

As a comparison, the US is not forecast to have a budget deficit below 2 per cent of GDP in any of the next 10 years and net government debt will peak at around 85 per cent of GDP.

The post-budget analysis of Australia’s government debt position from the international credit rating agencies has been unanimous. They have affirmed Australia’s triple-A credit rating with a stable outlook. It cannot get any better than this.

Add to that the fact that the yields on government bonds remain near historical lows and one has to wonder why there is any concern at all about the budget and government debt in Australia.

Those expressing concern about government debt may simply be mischief makers. In much of the commentary, there is a deliberate and mendacious tactic of comparing net debt a few years ago with gross debt now. This included coming up with unsubstantiated forecasts for gross government debt rising to $400 billion. There is nothing in the budget papers or elsewhere that hints at gross debt exceeding $300 billion at any stage over the forward estimates.

This is like painting a red dot on a daddy long legs and telling people it is a redback spider.

Then there is some other analysis which breaks all of the accounting rules that have been established over several decades to make up its own estimates of government debt. Born of ignorance, these attempts do things like add in state and local government debt to the Federal government number or add the government’s superannuation liabilities or the debt of public enterprises. This fantasy accounting throws out convention and international standards and is obviously wrong. Inevitably one just needs to look at who is resorting to these tricks to see what direction the bias, spin and in worst cases outright mistruths lie.

I suppose if all of the Commonwealth owned land, buildings and equipment, among other things, was added to the asset side, the government would have massive net financial assets, rather than net debt. But anyone who tried this trick to get a true estimate of net debt would be laughed at for the sheer absurdity of the position.

Then there is the good old standby for those wanting to make government debt to look like a redback spider which goes something like, “If the economy turns out to be weaker, then the budget will not return to surplus and debt will be even higher than projected”.

That is a truism. It’s correct of course, but there is the equally valid point that “If the economy turns out to be stronger than forecast, the budget will be in surplus sooner and the forecast surpluses will be even larger”.

Which of course is also a truism and not at all helpful for decent analysis of public finances.

The last word for now should go to the issue of the government’s debt cap or ceiling. As I wrote some time ago, the level of government debt needs to rise over the long run for issues to do with market stability (Why government debt must grow forever, November 2).

Those points are still valid.

According to research undertaken by ANZ Bank, on current budget figuring the level of gross government debt will peak at around $293 billion in 2014-15, a level just below the current $300 billion ceiling. As the budget returns to surplus in 2015-16 and beyond, the level of gross debt will fall. Or rather, the gross debt could fall if the government wanted it to, but the advice any government will receive from treasury, the Reserve Bank, the Australian Office of Financial Management and from financial market participants is that gross debt must not fall given the need to maintain a liquid and tradable bond market.

All up, for views on the level of government debt it is best to trust financial markets and the credit rating agencies rather than the words of those wanting to pursue an agenda which is based on a phobia and fantasy rather than sound analysis.

Australia’s government finances are among the strongest in the world. The return to surplus is prudent and based on sound assumptions. Commentary to the contrary is based on fear, opinion and bias and not fact.