Surreal nature of debt ceiling brawl

It's worth recalling how much things have changed as the government and the opposition confect a debt-ceiling brawl over Treasurer Joe Hockey's plan to raise the government's borrowing limit from $300 billion to $500 billion. In less than a decade, reality has been up-ended.

As Peter Costello prepared his 2003-04 budget, surpluses and privatisation sales had brought the elimination of a debt load that peaked at $107 billion in 1996-97 into sight.

Costello would go on to declare in April 2006 that the government had cut its net debt to zero, but in 2003 he already had a structural problem. The stock of Commonwealth bonds had fallen far enough to put the bond market onto a starvation diet.

Fixed interest market participants were becoming twitchy, because Commonwealth bonds are the Triple A "risk-free" benchmark for all debt issues. Costello wasn't personally very worried. Government research said the impact on rates was minor, and the government could always borrow when it needed to.

The lobbying was persistent, however, and in his 2003-04 budget Costello announced that the government would maintain a floor for the amount of Commonwealth bonds on issue - $50 billion.

The government was of course committing to borrow money that it didn't need. "If you borrow money you do not intend to spend, you have to do something with it," Costello observed in his memoirs, and for a while the borrowed money was put on deposit with the Reserve Bank.

During the 2004 election campaign Costello produced a more elegant and rewarding solution, however. The government would finance the Future Fund, and it would invest the money it received to build a kitty that would in time cover unfunded Commonwealth superannuation liabilities. It was a way of marrying two objectives, Costello wrote, "keeping the bond market alive while eliminating net debt".

In 2008 the floor that Costello created became a ceiling, as the Rudd government borrowed money to underwrite global crisis spending. A borrowing limit of $75 billion was legislated as an amendment to the Commonwealth Inscribed Stock Act.

A "special circumstances" authorisation for another $125 billion was created in 2009. It was absorbed into the general limit in Labor's 2011-12 budget and another $50 billion was added, taking the total to $250 billion. The ceiling was lifted again to $300 billion in Labor's 2012-13 budget, and that was what the Coalition inherited in September.

Hockey wants to boost the ceiling to $500 billion. He pushed an amending bill through the House of Representatives on Wednesday, but Labor and the Greens combined in the Senate on Thursday to lower the ceiling to $400 billion.

The pre-election budget update estimated that the $300 billion limit would be reached in mid-December, and Hockey says December 12 is the day. It also predicted that debt would hit $370 billion by July 2016.

Hockey could fight on and resubmit the legislation. He's warned there could be "massive cuts" in government spending if there is no deal.

It is being reported like an antipodean version of the political standoff over America's debt ceiling in September and October.

Washington's standoff might re-emerge in January and February, and Hockey has said that the possibility that renewed US budget tensions will infect global markets and economies is one reason he wants more headroom. This isn't America, however, and the local brawl is surreal.

First, it is an argument over a debt load that by international standards is still low. Hockey's $500 billion limit equates to about a third of the nation's annual income.

The OECD average is 112 per cent, and you can produce your personal number by looking at your debt load and your annual income. Most likely you are also more heavily geared.

Second, it's an argument about a limit that doesn't have a purpose here. It was a supposed discipline during the crisis, but turned out to be a fig-leaf that grew as Labor borrowed.

It is also an import from a US political system that is less centralised. As Bank of America Merrill Lynch economist Saul Eslake noted in a piece written in September recommending that the ceiling be discarded, America's Congress imposes debt ceilings to limit the borrowing capacity of the separately elected executive arm of government - the White House.

Here, the executive is part of the Parliament, and derives its mandate from its command of the lower house. Its spending is already subject to parliamentary authority: the debt ceiling adds nothing of substance, and provides the opposition of the day with an opportunity to grandstand, Eslake argues.

It's all about the optics of fiscal discipline rather than fiscal discipline itself. The ceiling could be axed, and the only thing that would change is that there would be less theatrics in Canberra: we must live in hope.

mmaiden@fairfaxmedia.com.au