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A long slide towards debt leads to Wayne’s budget swansong

How did the Australian economy, which boasts the best performance of the major advanced economies, end up with an estimated budget deficit of A$19 billion this year and an estimated debt of $178 billion…

Treasurer Wayne Swan has unveiled an $19.4 billion deficit, but promises to be back in surplus by 2016-17. AAP

How did the Australian economy, which boasts the best performance of the major advanced economies, end up with an estimated budget deficit of A$19 billion this year and an estimated debt of $178 billion?

The answer, of course, is quite simple – the failure of successive governments to live within their means.

Last week I pointed out how in the latter years of the Howard government, the Costello budgets included a raft of tax cuts and handouts which eroded the healthy surplus. This was due to exceptional falls in unemployment, jobs growth and wages growth which greatly increased tax receipts while somewhat eroding the tax base.

Rudd’s two-and-a-half year leadership of the Labor government was characterised by high spending, high debts and ill-fated economic policies. There were also a large number of policy back-flips and policy failures. The period was also dominated by the global financial crisis (GFC) and Australia was not alone in having to recalibrate its economic strategies to respond to what has been a significant, world-wide phenomenon.

While the idea of stimulus spending was generally supported, the amount and form of the spending has been the subject of considerable debate. Rudd took office in 2007 with net government saving of almost $45 billion and left office in June 2010 with an estimated net debt of almost $42 billion.

Commonwealth of Australia

Far from addressing the budget deficit Swan has delivered more budget deficits through failing to curb spending and/or widen the tax base, despite the Minerals Resource Rent Tax and the Carbon Tax.

Among the expenditure cuts and tax savings is the axing of an $1.8 billion increase in family tax benefits, due to start on July 1, which would have been worth between $300 to $600 a year for families. The Baby Bonus will now be paid as part of the means tested Family Tax Benefit A payments.

An income tax cut proposed for 2015-16 will be deferred. The tax cut was part of the carbon scheme compensation package and would have increased the tax-free threshold from $18,200 to $19,400. Savings of $900 million will be made over four years from changes to superannuation tax arrangements by taxing earnings of more than $100,000 on superannuation pensions and annuities will be taxed at 15%, instead of being tax-free.

Public service cuts over the next four years, including job cuts, will save $580 million, but it is well-known that meaningful savings in government expenditure come from cutting programs rather than public servants.

Although the government needs to pay for its additional expenditure promises there is also the need to address the underlying structural problem of reducing existing expenditure. All this is at a time when the carbon tax, Minerals Resource Rent Tax, and just about every tax, is not raising the expected revenue and Treasury’s forecasting performance is not looking good.

Massive revenue write-downs have been made to tax receipts, with a shortfall of around $17 billion this financial year, more than $20 billion the following year and $60 billion over the next four years. There are $43 billion in savings promised through a range of cuts.

A number of big ticket expenditure items are likely to blow out from original estimates. The National Broadband Network (NBN) is a very costly project for which no one knows the eventual true cost with any accuracy. The new tax (sorry Medicare levy) will only meet 40% of an estimated cost of DisabilityCare, (formerly the NDIS) which will inevitably blow out (if the experience of the rest of healthcare is any guide). The Gonski recommendations may very well be excellent, but few really understand them.

Commonwealth of Australia

No one trusts the estimates and most think that the government won’t be around much longer to implement even short-term measures, never mind the “the savings to fully fund priority investments for 10 years and beyond” described by the Treasurer.

According to Swan we are an economy in transition. And how is this transformation to occur? The resources boom moves from its investment phase to production (if prices hold up). Our region is the fastest growing in the world providing opportunities for Australian farmers, manufacturers and service industries. This will require a highly skilled, educated workforce (hence Gonski reforms - although it would seem the more highly skilled university students can fend for themselves with $2.3 billion to be cut from universities).

As Swan put it,

“You don’t want to find yourself in the fastest growing region in the world, with yesterday’s economy.”

Excuse me, but haven’t we been in the fastest growing region for some time now? Shouldn’t this investment have been done years ago?

And,

”Cutting to the bone puts Australian jobs and our economy at risk, something this Labor government will never accept.”

No one is asking for drastic cuts, but simply for government to live within its means.

Join the conversation

38 Comments sorted by

  1. Gerard Dean

    Managing Director

    Bravo Professor!

    What a wonderful, simple thought to finish with, 'No one is asking for drastic cuts, but simply for government to live within its means'

    I am not sure if you will win many friends on this website for pointing out such a simple truth.

    Take care out there.

    Gerard Dean

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  2. Jerry Cornelius

    logged in via email @hotmail.com

    What on Earth do you mean, Prof, by the line:

    'No one is asking for drastic cuts, but simply for government to live within its means.'

    The Australian Federal government issues the $A so it is impossible for it to run out of them. Your imprecation that the govt. 'live within its means' has no meaning. It is economic jibberish.

    If government debt were so bad and deficits so terrible, how do you explain the fact that the average budget outcome over the last 40 odd years is a deficit of more than 2% of GDP? And this one is what? About 1.7%?

    Get a grip.

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    1. Greg North

      Retired Engineer

      In reply to Jerry Cornelius

      " The Australian Federal government issues the $A so it is impossible for it to run out of them. Your imprecation that the govt. 'live within its means' has no meaning. It is economic jibberish. "
      Are you inferring Jerry that it is good economics to just start printing more money?
      That's gibberish and it is you who need to get a grip.

      As for your average budget outcome over the past forty years, it is far more relevant to look at the average and more so the trend of the last five and a half years compared to the 34.5 that preceded it in those 40 years.

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    2. Ted Stead

      Consultant

      In reply to Greg North

      Greg, physical currency makes up only a tiny proportion of all money, so "printing money" just wouldn't cut the mustard.

      The government could, however, use electronic means to purchase anything available in AUD. I think this is what Jerry's referring to. That and the fact that basic maths, via the sectoral balances, tells us that the Australian government should run a permanent deficit.

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    3. Christopher Seymour

      Business owner at Location

      In reply to Jerry Cornelius

      If as you say, it is impossible for the Federal Government to run out of A$ - why doesn't it just issue each Australian with a million dollars? That way we could all be rich and no one would have to work. Better - it could issue every Australian with $2 million, and then take tax of $1 million, and the budget would be balanced until 2120.
      We know this scheme would work because Robert Mugabe tried it - and look how well Zimbabwe is doing.

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    4. Ted Stead

      Consultant

      In reply to Christopher Seymour

      Christopher, that's not what Mugabe tried; Zimbabwe printed money in order to keep up with inflation, but it didn't cause the inflation itself.

      Your idea of giving everyone $1m, however, would cause inflation. Instead, why not just spend enough money to get the economy at maximum resource utilisation; no more, no less? That would be a better outcome than the 2.3m people (according to Roy Morgan) either unemployed or underemployed that we have at the moment.

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  3. Garry Baker

    researcher

    "" How did the Australian economy, which boasts the best performance of the major advanced economies """

    Er, - the author has fallen for this mantra too. Who coined it ? - Wayne Swan of course, and he has repeated it often

    However, the sad truth is we got by on asset sales - Nothing more. We have a large quantity of "rocks" the world wants(Australia's god given assets - (indeed, once "ever" assets) and Swan, along with his prior counterparts, has sold them off to keep the cash rolling…

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    1. Greg North

      Retired Engineer

      In reply to Garry Baker

      " To make it worse, we Australians live off the scraps from the sales. Indeed, we own about 17% of the extractive industry, now colonised by global miners who in turn ship the real profits back to head office in their home countries. Never once has Canberra mandated that these extractive industries could only proceed when locally developed industries and services could keep pace with a supply to the diggers - Nope, they just allowed them to run their own show - importing everything

      So, in spite…

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    2. Don Secomb

      Mental Health Professional

      In reply to Garry Baker

      Well, John Howard has fallen for Swan's trick too, apparently, according to the SMH: Resilient economy in better shape than most, says Howard

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  4. Toby Paltridge

    logged in via Facebook

    I have a few questions:

    -How can a country that borrows money in its own sovereign currency ever go broke?

    -What percentage of GDP is the predicted fiscal deficit and how does this compare to other developed nations?

    -How does our current economic performance, which is "the best performance of the major advanced economies", compare historically to earlier periods? That is, rather than comparing us to everyone else currently (who are doing badly), how does Australia today compare to Australia…

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    1. Toby Paltridge

      logged in via Facebook

      In reply to Toby Paltridge

      Actually, I have another one:

      -Is is true that government net expenditure is equivalent to the opposite net position of private sector expenditure? That is, if the government budget is in surplus does that mean that private expenditure must be in deficit, by definition, and vice versa?

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    2. Garry Baker

      researcher

      In reply to Toby Paltridge

      Like the health of the stock market, the health of a country can be confidence thing. Shatter it, and spending stops.

      Will people really start spending more now that the government is spending less? A succession of mental pygmies running Canberra have relied on foreign capital inputs for this so-called spending - where supposedly, these inputs will create jobs etc, for the local spenders. However, it translates to "selling Australia" to make it happen

      As for the piddling government fiscal deficit of A$19b for this year - the sad truth is these same big spenders have us heading for a A$300 billion debt, and very little of this debt can be reconciled with sound country building initiatives. A bit like the Lotto winner who bought some flash cars, traveled the hot spots in the worlds bars - and wasted the rest

      As for fostering income producing assets, forget it

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    3. Toby Paltridge

      logged in via Facebook

      In reply to Garry Baker

      You know what would increase confidence?

      The Australian government spending as much as it needs to in order to make up for the current shortfall in private consumption. This would create jobs and help people pay off the massive amounts of private debt they accumulated in the previous decade. Then, once this debt was paid off, the private sector would start consuming again, the number of jobs would increase, taxes would naturally increase and welfare payments decrease as a consequence and the budget deficit would naturally decrease.

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    4. Greg North

      Retired Engineer

      In reply to Toby Paltridge

      " -How can a country that borrows money in its own sovereign currency ever go broke? "
      Just the same way that a company in Australia with Australian shareholders will go to the wall if the company is continually making a loss and shareholders do not want to put in anymore and banks want their money back instead of loaning more.

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    5. Toby Paltridge

      logged in via Facebook

      In reply to Greg North

      Wrong, Greg. A national government that borrows money in its own currency can never go broke or be unable to repay its debt. This is because it owns the currency in which its debt is denominated and can therefore simply create more currency in order to repay its debt.

      Technically, a government that is sovereign of its currency (as Australia is) does not need to borrow at all as it has the capability to produce as much money as it wants.

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  5. Toby Paltridge

    logged in via Facebook

    BTW, this article's focus on absolute numbers rather than percentages is both inflammatory and misleading. Numbers by themselves mean nothing without something to compare them to. For example, what percentage of GDP is a government fiscal deficit of A$19b? Is this percentage historically high or low? How does it compare to the fiscal deficits of other developed nations?

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  6. none at all

    none

    Thanks for a sensible analysis.
    I'm also indebted to Swan and Gillard for their inspiring example, as I awoke this morning with the solution to all of my problems now clearly apparent: I've decided to trade my 19-year-old Pajero on a couple of new Mercedes and buy one of those multi-million dollar waterfront mansions and luxury yacht on the Gold Coast. When I told my wife, she said we can't afford it, but I assured her that it would be easy. We've spent far too long spending only the money we have, so.I'll just phone Labour party headquarters for expert advice on how to spend first and ask questions later!

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    1. Toby Paltridge

      logged in via Facebook

      In reply to none at all

      Comparing a household budget to that of a sovereign nation that controls its own currency is both incorrect and inappropriate. It is precisely this kind of false comparison that has lead us to such a ridiculous focus on trying to run a fiscal surplus at a time when the economy is still poor.

      The individual situation of a household (the micro level) is not comparable to the macroeconomic position of a national government (which deals with aggregates).

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    2. Greg North

      Retired Engineer

      In reply to none at all

      I am disappointed Bob in that you have decided not to go for a Buick, the oldest active US Auto.
      Forget the GC as there are far better places and I've got a 1925 Buick in as restored condition, an ex Wedding Car if you are interested.

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    3. none at all

      none

      In reply to Toby Paltridge

      Toby Paltridge,
      I'm well aware of the point you make, but long term financial responsibility is nevertheless a good idea, even for governments. I wonder whether they still feel good about the "flat screen TV" handout, the pink batts, the school halls etc.
      Sorry you missed my point.

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    4. none at all

      none

      In reply to Greg North

      Good comment, Greg. Our first car was an ancient 1928 Oldsmobile and I wish I'd kept it. I owned a 1964 Buick when doing post-grad work in Canada in the sixties, but it was a lemon and let the side down. My last car was a Mercedes, but the Pajero turned out to be far superior replacement.

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    5. Toby Paltridge

      logged in via Facebook

      In reply to none at all

      Do you know what "long term financial responsibility" is for governments? Maximising jobs and maintaining a stable price level. A focus on anything else is a purely arbitrary and ideologically based goal.

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    6. Don Secomb

      Mental Health Professional

      In reply to Toby Paltridge

      Toby, really appreciate your contribution here. A higher level analysis than in the article and well worth reading.

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  7. John Doyle

    architect

    I for one think we are nibbling around the edges of a major shift.
    I can't forecast how long we will have to wait, maybe a generation or two, but sooner or later the population "bomb" is going to blow.
    It's just arithmetic, an arithmetic no one seems to "get"

    http://youtu.be/umFnrvcS6AQ

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  8. Greg North

    Retired Engineer

    You are getting somewhere near the truth Phil when you get to something like:

    " Our region is the fastest growing in the world providing opportunities for Australian farmers, manufacturers and service industries. This will require a highly skilled, educated workforce (hence Gonski reforms – although it would seem the more highly skilled university students can fend for themselves with $2.3 billion to be cut from universities). "

    The reality is somewhat more stark though for whilst our farmers…

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    1. John Doyle

      architect

      In reply to Greg North

      I don't see why we are not trying what Germany is doing so well, that is making the machinery that makes the products we want or need to buy. You don't need a huge industry but you do need a super skilled workforce to do it. We just can't be bothered it seems as already we have an enviable lifestyle. But if we don't get with the future we will sooner than later be on the scrap heap.
      Already our land is immeasurably impoverished compared to the state at the beginning of western settlement. It's done us well to date but we need now to husband those resources and start something different

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    2. James Hill

      Industrial Designer

      In reply to Greg North

      A real fantasy world is one where $1.25 TRILLION in private mortgage debt is simply ignored altogether in the debate.

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  9. Dianna Arthur

    Environmentalist

    "How did the Australian economy, which boasts the best performance of the major advanced economies, end up with an estimated budget deficit of A$19 billion this year and an estimated debt of $178 billion?"

    Asks, Phil Lewis.

    Answer, because Mr Swan has done the unthinkable - presented a budget based on reality with a vision for the future. Unlike the 'traditional' sunshine & butterflies pre-election budget.

    Swan and the Labor party will be punished for such effrontery come September 14.

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    1. Toby Paltridge

      logged in via Facebook

      In reply to Dianna Arthur

      Hardly. A true reality based budget would have a much larger deficit than the one proposed by Labor. Mr. Swan's budget relies on some pretty optimistic predictions of future tax revenue.

      No major party has had the guts to get up and say that the current deficit is not a major issue, in fact it should be enlarged, and that their priority is creating jobs and controlling inflation.

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    2. John Doyle

      architect

      In reply to Toby Paltridge

      Good idea if we want the Aussie to be worth US 50 cents.
      Then yes we could compete with our exports. I suggest we pay off all our external debts now while the $A is at parity. Print money to pay for it [secretly], sell all our reserves of gold etc., and then when we don't owe much devalue the dollar and s reset everything.

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    3. Toby Paltridge

      logged in via Facebook

      In reply to John Doyle

      Given that the Australian economy is still one of the strongest (comparatively) out of all the developed nations, I hardly think that a modest increase in the government fiscal deficit would cause foreign investors to stop investing here (which is the primary cause of our high exchange rate). We still offer investors the best and safest returns. Over current very low interest rate also indicates that there are no shortage of savings sitting around waiting to be borrowed.

      Also, would it be a bad thing if the value of the AUD did drop?

      What external debts does the Australian government have, or are you talking about the private sector? As far as I am aware, all of the Australian government's debt is denominated in AUD, so the value of the AUD relative to other countries' currencies is irrelevant in this context.

      What would be the point of selling our gold reserves, John?

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    4. John Doyle

      architect

      In reply to Toby Paltridge

      The debt to our o/s lenders needs to be repaid from valuable dollars, say at parity. It is extremely relevant. I would sell off the gold reserves if we needed the money so that we didn't have to devalue the dollar before the deals were done and to reduce the actual cost to the treasury. If we just used QE then the dollar would devalue as we added dollars over the value of our worth.
      The idea is to do it first to get the best benefit before some other country does it to us and sets off a landslide. Do we want to be thought of as being like Argentina, who just stopped paying their debts? It would help if we did it owing little. Investors would lose because selling would cost them a packet. Nothing stops them staying put.
      I don't know how much the Gov't owes but whatever it is it needs to become zero.
      My whole idea is a bit tongue-in-cheek, since I'm no expert.

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    5. Toby Paltridge

      logged in via Facebook

      In reply to John Doyle

      Ah, I think I see what you are getting at now, John. The exchange rate is still irrelevant, though, as the Australian government borrows in AUD, not any foreign currency.

      From a Modern Monetary Theory perspective, a sovereign government that has its own fiat currency (as Australia does) can never run out of money, as it is the one that produces it. If the government needs more money, it simply creates it through debiting the relevant bank accounts. Given this, debt is used, not to finance government…

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    6. Ted Stead

      Consultant

      In reply to Toby Paltridge

      This is borne out by the fact that when the Howard government ran surpluses, and the bond market subsequently shrank, the banks ("interested stakeholders" who no doubt would have previously called for reduced debt and deficits according to the prevailing neoliberal logic) suddenly realised they were running out of risk-free assets, and so requested that the government continue to issue treasury bonds.

      The results of the review came out in the following budget: http://www.budget.gov.au/2003-04/bp1/html/bst7.htm

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    7. John Doyle

      architect

      In reply to Toby Paltridge

      Yes but it will still have to be converted back to the lender's currency, even if after the fact. my suggestion was to do it while the conversion was say at parity. This to not diminish the repayment so we keep our "good name". It's not a question of us running out of money as you say, but of us devaluing the currency in half, overnight.

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