It's all a question of shared burden
Q: Is the debt problem Joe Hockey outlined in the midyear economic and fiscal outlook animal, vegetable or mineral?
A: Animal. A baby elephant, perhaps, and stubborn like a mule.
Q: Is it bigger than a bread box?
A: Yes, and considerably more expensive. Deficits stretch away to the horizon according to Mr Hockey's midyear economic statement. They get smaller as the years go by, falling from 2.7 per cent of gross domestic product this financial year to about .5 per cent of GDP in 2023-24, but they stay high long enough to push Australia's debt load higher as the government borrows to fund the budget hole.
Q: Does it have a colour?
A: Yes, and that colour is red: net debt was zero ahead of the financial crisis. It is expected to hit $191.5 billion or 12.1 per cent of gross domestic product this financial year, hit $280.5 billion or 15.7 per cent of GDP in 2016-17, and peak at 16.2 per cent of gross domestic product in 2018-19. That is low by post-global crisis standards. The OECD average is almost five times higher, at 78 per cent. But Australia is in a deficit and debt rut if nothing is done.
Q: Is the problem manufactured or natural?
A: Both. Labor's final budget predicted a deficit of $18 billion this financial year and a return to surplus in 2016-17. Treasury's pre-election economic statement also predicted a surplus in 2016-17, but said the deficit this year would be $30.1 billion.
Mr Hockey's midyear statement ramps the forecast deficit this year up to $47 billion, and lowers the budget numbers by $68 billion over the four years to 2016-17.
He says "more than half" of the blowout is due to softer economic conditions: the pre-election forecast for growth of 2.5 per cent this year is unchanged, but the growth estimate for 2014-15 has been downgraded, from 3 per cent to 2.5 per cent and expected tax receipts over the four-year period have been downgraded by $37.8 billion.
Fiscal expansion by the new government is a second layer, however. It has swung $8.8 billion to the Reserve Bank to boost the bank's reserves and increase the likelihood of Reserve Bank dividends in later years, has reversed Labor taxing decisions including a crackdown on car lease fringe benefits at a cost of $2.9 billion, and paid out an extra $1.2 billion in school funding as part of its Gonski funding double backflip.
The new numbers also rely on more bearish calculations for unemployment and growth in the final two years of the four-year forward estimates period, but the longer term stubbornness of the deficit-debt problem is also down to a structural increase in outlays, fed by new programs including Labor's national disability insurance scheme, higher education spending and health spending that is ramping up as baby boomers grow older.
Q: Can the problem be bought or sold?
A: Yes. Governments fund deficits by issuing Commonwealth bonds, IOUs, in effect. Ahead of the global crisis the Howard government didn't need to raise money but issued bonds anyway, to keep the bond market ticking over. Now money is raised because it is needed to fill budget holes. The new statement predicts there will be $460 billion of Commonwealth bonds in circulation in 2016-17 and $667 billion by 2023-24, about 26 per cent of GDP at the time. The government can find buyers, but will do so at a price pushed up by its neediness, and non-government borrowers will also be forced to pay more.
Q: Is the problem visible?
A: Not from the moon, but definitely from New York. Mr Hockey's new deficit and debt numbers are on the screens of the credit agencies that currently rate Australia triple A.
They won't be overly concerned by the headline debt-to-GDP ratio that Australia is notionally headed for, as long as the government has a plan to get out of its debt rut. The Coalition has, however, cornered itself to an extent. Mr Hockey says promises to not cut health, education and defence outlays will be honoured.
Q: Are the numbers useful?
A: Yes. The numbers will be spun by both sides. The government can criticise Labor for increasing the structural spending base at a time when the revenue base was falling. Labor can point to Coalition decisions that have added red ink.
Q: Are they wearable?
A: Yes - ideally by as many people as possible. In its big expose of the structural debt problem this year the Grattan Institute said that reform was politically contingent on a consensus existing about the size and nature of the problem and the need for action among all those affected, including politicians, bureaucrats and the public.
Mr Hockey's statement should create that consensus, and the institute says the best fix is one that is worn by as many people as possible, taking into account their capacity. That means spending cuts and tax increases, including a few large measures that make a difference. Expect hints about them well before they are confirmed in the May budget.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Australia's debt and deficit situation is described as a 'baby elephant' problem, indicating it's large and stubborn. The deficits are projected to decrease over time but remain significant enough to increase the national debt as the government borrows to cover budget shortfalls.
Australia's net debt is expected to peak at 16.2% of GDP, which is relatively low compared to the OECD average of 78%. However, the country is still in a deficit and debt rut if no action is taken.
The debt problem is attributed to both manufactured and natural causes. Economic conditions have softened, leading to lower growth and tax receipts. Additionally, fiscal expansion and structural increases in spending on programs like the national disability insurance scheme and higher education contribute to the issue.
The government funds its deficits by issuing Commonwealth bonds, essentially IOUs. This practice raises money needed to fill budget gaps, with predictions of $460 billion in bonds by 2016-17 and $667 billion by 2023-24.
Yes, while not visible from the moon, Australia's debt and deficit numbers are closely monitored by international credit agencies, which currently rate the country as triple A.
The debt situation is politically charged, with both sides of the government using the numbers to criticize each other. The Coalition blames Labor for increasing structural spending, while Labor points to Coalition decisions that have added to the deficit.
The Grattan Institute suggests that reform is necessary and politically contingent on consensus among all stakeholders. Solutions include spending cuts and tax increases, with a focus on large measures that can make a significant impact.
Everyday investors might be impacted by changes in government policy aimed at addressing the debt issue, such as tax increases or spending cuts. Additionally, the need for the government to issue more bonds could influence interest rates and borrowing costs.
Call 1300 880 160
Start a chat
Schedule a call
