Swan's dangerous debt game
Debt undertaken to allow for stimulus after the GFC was arguably the right move. But increasing debt now, as Wayne Swan has done, is putting Australia into dangerous territory.
Coalition: "Why is Labor boosting middle-class welfare in a year when we should be slashing expenditure to offset sharp declines in revenue?"
Labor: "How dare you insult working families! Do you think raising kids is cheap?"
Deciding to put a new bulge in our already bloated system of welfare entitlements – through increases to family tax benefit and the ramped up 'schoolkids bonus' – has nothing to do with whether or not raising children is cheap.
It has everything to do with this government's (and most likely the next government's) inability to raise enough money to cover even day-to-day expenses.
Labor is borrowing heavily to fund the normal operations of government, as well as ambitious off-balance-sheet projects such as the NBN.
Malcolm Turnbull summed it up neatly during question time yesterday: "Will the treasurer confirm that, if he wasn't shuffling at least $7.5 billion of spending out of 2012/13 and into the previous and later years, and if the spending on the $50 billion NBN was counted towards the budget bottom line, then the budget would show an actual deficit of at least $12 billion."
In 'normal' times (remember them?) the NBN part of that question would be quite unfair.
Methods of accounting accepted by both sides of the house are used to justify taking the NBN and other such projects 'off-balance-sheet'. Investing in something that will turn a profit has long been accepted as nothing to do with this year's budget – the government uses its credit rating to raise funds cheaply for NBN Co, which deploys them, starts making money (and as a monopoly how can it not, unless most Australians go completely wireless?), and then gives money back to the government to reduce the value of Commonwealth Government Securities on issue.
Nothing to do with the budget, in normal times.
But then nothing post-GFC is normal. Against a backdrop of global instability (Greece again), ever-increasing national debt, and shrivelling revenue, shuffling a few billion back/forward and ignoring the NBN funding take on a whole new look. Hence Turnbull's question.
I have been a defender of the government's debt position for some time – it is true, as Treasury says, that we have one of the lowest national net-debt levels in the developed world. But the time for defending that debt is over – Tuesday's budget shows net debt 'peaking' not at 7.5 per cent of GDP in 2011/12 as forecast a year ago, but at 9.6 per cent of GDP in the same year.
You climb one little mountain, and lo, when you reach the summit there's a bigger one ahead – there is every likelihood that this 'peak' is just another foothill obscuring the real debt mountain we'll face in future years.
The government knows this, hence its decision to heed advice from the Australian Office of Financial Management (the mob that issues all those CGSs) and raise its own debt ceiling from $250 to $300 billion.
Swan defended that decision at the National Press Club yesterday with another argument to make logicians squirm: "What tends to happen is that government revenues come in big lumps towards the end of the year but government expenditure goes out evenly across the year. And then secondly, we also have to retire bond lines as we bring new ones on. Those two factors combined has led the AOFM to say to us that to cover the mid-year financing requirement which is only temporary, which will go over the cap, that we should lift it."
So we're raising the debt ceiling because on Wayne Swan's watch, the AOFM has suddenly realised that bond issuance and retirement is not always a smooth process, and that government spending goes out in chunks.
Amazing that nobody else noticed that during the first 111 years of federation.
Debt is now getting away from us. Yesterday I visited the always excitable Barnaby Joyce to get his take on the situation. I have long disagreed with the senator's argument that the rate of increase of debt is the most important thing – during the GFC a rapid rise in Commonwealth debt was, in my view, justified to keep hundreds of thousand of businesses solvent. That required a dramatic steepening of the rate of debt issuance.
However, that steepening should have flattened much more than it has. And it's the debt stock we're left with that matters.
Joyce's debt accounting looks something like this:
– While Commonwealth net debt is around $135 billion, gross debt was "$228.8 billion" at the time of my visit to Joyce's office (has AOFM installed some kind of chip in his brain that updates his figures in real time?)
– That $90 billion difference mainly accounts for chunks of money "stuffed up logs", according to Joyce, and not easily made available in times of crisis. That's why Joyce looks mainly at gross, not net debt. You never know when the next crisis will arrive, though in Athens the answer looks to be 'soon'.
– Federal debt should be added to something like $250 billion in debt issued by the states. Joyce points out that Japan's oft-quoted debt to GDP ration of 200 per cent includes every part of that country's public debt. On that basis, says Joyce, our national debt is getting close to half a trillion bucks. In a $1.3 trillion economy, that's a debt/GDP ratio of around 38 per cent.
That figure might be defendable if were looking ahead to happy times. The $90 billion or so net-debt that Keating bequeathed to John Howard is roughly the size, in real terms, of the federal net-debt today. But the Keating debt was only able to be paid off in a decade because of billions raised from the sale of Telstra, and the 'mining boom mark one' that pumped so much revenue into Peter Costello's Treasury.
Neither of those windfalls are in prospect for the next government, or the next, or the one after that. The portion of the population that is paying taxes is shrinking, mining tax revenue appears to be shrinking (see: End of a miner miracle, May 8), and global economic growth will be nothing like the halcyon days of the Howard era.
That's why spooning out great dollops of middle class welfare is completely unjustified at this time. Our debt level has gone far enough, and this budget should have done more to rein it in.
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