The debt we can't pay is growing

We're all indebted to David Murray – not the way we used to be, when roughly a quarter of mortgage holders owed money to the bank he ran, CBA. Nor in the way public servants owe him a debt of gratitude for putting the Future Fund on a steady course to pay out their generous super entitlements.

Rather, we're all indebted to him for telling the truth.

Last night's interview with Murray on the ABC's 730 Report is essential viewing. His is perhaps the calmest, and most experienced voice yet to tell Australians what we don't want to hear – that our 'modest' debts are in fact a ticking time-bomb that only a surge in common sense can diffuse.

Murray's comments follow the worse than expected trade deficit data yesterday, that saw alarming revisions to the August data as falling commodity prices bit more deeply than the first data release indicated.

That worsening trade position undoubtedly helped tip the Reserve Bank board into a rate-cut decision on Tuesday. Some expect that cut to stimulate the housing market, as well as business investment, and get things moving again.

If bullish forecasts for higher mortgage borrowing, and therefore stronger bidding on houses, do not eventuate (and I for one do not think they will) past experience suggests many variable-rate mortgage holders will keep paying the same monthly instalments, and thereby accelerate their domestic deleveraging.

That's good news in shoring up our position relative to what Murray last night called "people who save and live offshore" – the households predominantly in east Asia that do not consume with the same abandon as the average Aussie. The less mortgage debt we collectively hold, the less our banks need to prostrate themselves in volatile wholesale debt markets.

But then Murray wasn't really talking about our private debt problem last night (he is a former banker, after all). It was the public debt position that he dissected with that clear, analytical mind.

He said, of both the Howard and Rudd/Gillard governments: "...they haven't addressed this fundamental shape of the Australian economy. And what that shape implies is that we need capital from the rest of the world, we have a high operating leverage problem in the budget, that is, the welfare costs in Australia are so high ...

"And a seller of commodities is a price-taker whereas we have a high fixed-cost in our budget, mostly in welfare, which is now up to 100 per cent of the personal tax take. So, with those problems and a persistent current account deficit, Australia is not a country that can afford very much public debt, yet the public debt's been rising."

Watch the video, and you'll see Murray stress the word 'not' in that last sentence. He will be mindful that while Commonwealth net debt is only 9.6 per cent of GDP, combined state and federal debt is now around 29 per cent of GDP.

Murray is arguing that any country whose fortunes are hitched so firmly to commodity price cycles – including periodic booms and busts – cannot have such a whopping part of its public finances committed to funding entitlements, and certainly should not be borrowing to fund those entitlements.

Now, if those entitlements were propping up a mass of disadvantaged Australians, we'd have an intractable problem. If that were the case, Murray would be calling for real harm to be done to families on struggle street.

But he is not. Far too high a proportion of the 'entitlements' he's talking about are flowing to working families in fairly comfortable positions.

The government taxes such families at one rate, then immediately hands back a large chunk through the family tax benefit system, and other entitlements.

So let's be perfectly clear about this – an attack on 'entitlements' is not a call to strip poor families of the money that will give them a hand up, and allow them to lead dignified, productive lives.

It is, I'm sure Murray would agree, a call to be honest about who is paying tax in Australia. Many Australian who think they're paying the second highest tax rate of 37 cents in the dollar, are in fact paying a lot less once the complicated family tax benefit entitlements have been paid.

In the budget before last, Treasury expected federal net debt to peak at 7.5 per cent. It's now 9.6 per cent, and despite aggressive cost cutting by conservative governments in Queensland, New South Wales and Victoria, state debts are still worryingly large.

And this presents the same conundrum for both Tony Abbott and Julia Gillard. Whoever wins the next federal election (should we add Mssrs Rudd and Turnbull to that possible list?) will have to tell us pre-election that they intend to keep the middle-class-welfare train on the tracks. And after the election, the will have to begin taking it apart.

That's that truth David Murray told last night. The sooner we listen, the less this gargantuan problem will cost us to fix.