Shouting down Barnaby's debt dilemma

In the season final of the ABC's Q&A program last year, Barnaby Joyce and satirist Jonathan Biggins found themselves sitting uncomfortably close to one another.

Joyce upset Biggins by accusing him of trotting out "a generic lefty line" and Biggins got his own back by stirring considerable support in the audience by arguing against Joyce's view that the Gillard government is borrowing too much.

In the current political climate, one is required to like either Joyce or Biggins (or perhaps neither), because despite his protestations, Biggins' views that night were a bit lefty, and Joyce's a bit righty.

Biggins argued at one point that the federal budget squeeze is better tackled by raising more tax than slashing spending. Joyce jumped in with "Hands up those who want to pay more tax?" – and was a bit shocked to see a large cross section of the audience put up their hands. One-nil to Biggins.

But back to debt. The size of the federal government's borrowings since Labor came to power has been a constant theme for Joyce and one that is widely misunderstood.

Biggins continued that misunderstanding when he interjected "Barnaby, have you got a mortgage?" – at which point roars of approval from the audience drowned the senator out.

More's the pity, because Joyce understands the issue better than most. To use the mortgage analogy, the common view is that if a household can carry several times its income in debt, why can't a nation carry just just under 30 per cent of GDP as debt? That's the combined debts of the federal and state governments – David Murray was out recently arguing that 29 of GDP is too much (The debt we can't pay is growing, October 4)

Joyce likes to point out, with much gesticulating, that if a state buggers up health or education, it's the federal coffers that provide bailout money. That's why, like Murray, he looks at the whole debt position.

Labor likes to talk only about federal debt – fair enough, since that's what they control – and boasts that net debt is peaking at 10 per cent of GDP. The problem with that argument is that 18 months ago Labor was promising net debt would peak at 7.5 per cent.

So the net debt blowout during one and a half fiscal years is 2.5 per cent of GDP, which in a $1.4 trillion economy equates to around $35 billion.

To stick with the mortgage analogy, the government's just extended its line of credit a bit – it's in the same ballpark, so surely everything's okay?

Not quite. Remember that although commodity prices have come off a bit in recent months (well, dived and recovered a bit), we've just been through an economic good patch. The high dollar has helped import substantial dis-inflation, and mining activity has filtered through the rest of the economy to keep business investment up and unemployment down.

The catch is that successive governments have tried to out-do each other with tax cuts, and the government now finds itself working with a very small tax base – 22.1 per cent of GDP at last count.

The one attempt to fix that, the RSPT, was blown away with Kevin Rudd in June 2010, and the radically downsized MRRT has so far returned nothing.

That means we're in a fiscal squeeze with dicey prospects at best of seeing corporate tax return federal revenues to growth. Bracket creep will provide a bit more, as pay rises push workers into higher tax brackets, but that in itself would take a long time to ease the squeeze.

Now let's look at the mortgage analogy one more time, through a bank manager's eyes. Despite a strong economy, Labor has failed to get the pay rise it was expecting, and so asked if it could extend its mortgage a bit. It then had to borrow a bit more than was approved at budget 2011. It then tells you there's a good chance its income will be reduced next year.

It's at about this point a bank manager starts getting nervous and double checking the value of the property against which the loan is secured, just in case it might need to be sold.

Joyce's point is, essentially, that you can't sell Australia. We have to service those debts from a historically low tax base, that may in fact continue to contract. In those conditions, it's probably a good idea not to borrow another cent ... and perhaps even take Biggin's suggestion to go an election saying "hands up who wants to pay more tax!"