tag:theconversation.com,2011:/au/topics/debt-to-gdp-ratio-5192/articlesDebt to GDP ratio – The Conversation2020-11-09T14:52:30Ztag:theconversation.com,2011:article/1495712020-11-09T14:52:30Z2020-11-09T14:52:30ZA settlement with trade unions remains the best way forward for South Africa<figure><img src="https://images.theconversation.com/files/368254/original/file-20201109-14-h7p3ao.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Expenditure cuts require a political settlement that has failed to materialise under South Africa's President Cyril Ramaphosa</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>South Africa’s <a href="http://www.treasury.gov.za/documents/mtbps/default.aspx">medium-term budget</a> is supposed to provide an indication of how public finances will be managed over the next three years, but in the last decade it has largely served to illustrate persistent gaps between aspiration and reality. In part, this is because of limited economic growth and repeated shortfalls in tax revenue. </p>
<p>The COVID-19 pandemic has led to a rapid worsening of the situation, as reflected in the debt to GDP ratio: a monetary measure of the broader national hopes that have been dashed over the same period. The cumulative result is that, unless economic growth experiences a miraculous resurgence, the country will need to implement large decreases in expenditure or increases in revenue to get debt under control. Critics argue that doing so will further harm growth, while proponents argue that the alternative – risking a possible debt default – is worse. </p>
<p>The Treasury is <a href="http://www.treasury.gov.za/documents/mtbps/2020/2020%20MTBPS%20presentation.pdf">proposing R300 billion (US$19.2 billion) in expenditure cuts</a> over the next few years, mostly to the amount allocated to salaries, and a comparatively minor increase in taxes of R25 billion over the same period from measures that have not yet been specified. It is also pushing a set of so-called ‘structural reforms’ to increase growth. </p>
<p>But the expenditure cuts require a political settlement that has failed to materialise under President Cyril Ramaphosa, despite hopes that he could facilitate a social compact. And the structural reforms are unconvincing and poorly substantiated.</p>
<h2>From fiscal consolidation to austerity</h2>
<p>After the immediate impact of the global financial crisis between 2007 and 2009, Treasury allowed expenditure to keep growing in the face of lower economic growth and lower than expected revenue collection. As a result, debt increased both in absolute terms and relative to the size of the country’s economy. </p>
<p>Later, it sought to implement <a href="https://www.engineeringnews.co.za/article/spending-ceiling-lowered-taxes-to-be-raised-as-nene-holds-fiscal-consolidation-line-2014-10-22">a policy of ‘fiscal consolidation’</a> to stabilise debt levels while avoiding cuts to expenditure. Some have wanted to call this ‘austerity’, in a manner that invokes the kinds of policies <a href="https://thehill.com/opinion/finance/452939-will-we-learn-from-the-greece-austerity-debacle">implemented in Greece</a> after it defaulted on its debt repayments and found itself under the thumb of the International Monetary Fund and European Central Bank.</p>
<p>But that is obviously misleading. At most, some of the decisions implemented were a form of what might be called ‘austerity by stealth’. That involved maintaining expenditure caps in the face of rising civil servant salaries and population growth. This meant that the number of civil servants relative to the population was reduced in areas like health and education. While promises were made to protect posts that were crucial for service delivery, little evidence was provided to demonstrate that this actually happened.</p>
<p>The situation is now more serious. Over the years government’s debt stabilisation targets have risen from 40% of GDP, to 50%, then a short-lived concession in the 2017 medium term budget that debt would exceed 60% of GDP and stopping its rise may not be possible for the foreseeable future. From the 2018 budget onwards the Treasury returned to the narrative: the 2018 budget promised debt stabilisation at 56% by 2022, the 2019 budget <a href="http://www.treasury.gov.za/documents/national%20budget/2019/2019%20Budget%20presentation.pdf">promised 60% by 2023</a>. Then the 2020 budget conceded defeat again, stating that ‘debt is not expected to stabilise over the medium term’. </p>
<p>After the impact of COVID-19 on the global economy and government’s strict lockdown on the local economy, the special adjustment budget tabled in July painted two scenarios: one where drastic measures were taken to stabilise debt at 87% of GDP by 2023 and the other where it would escalate to 106% by that year and continue growing. That budget argued for aiming to achieve the lower target within three years, but already the medium-term budget has given up on both dimensions. It is now <a href="http://www.treasury.gov.za/documents/mtbps/2020/2020%20MTBPS%20presentation.pdf">targeting 95.3% by 2025</a>. </p>
<p>While excuses and justifications can be provided, the simple result is that South Africa’s public finances are worrying and its targets increasingly lack credibility. </p>
<p>Although some economists try to estimate what a maximum, sustainable debt to GDP ratio for a country is, there is no magic number. For the majority of countries, without correspondingly higher economic growth, the higher the ratio the greater the likelihood of defaulting on their debt. South Africa’s ratio is already the highest it’s been in the post-apartheid era and is growing rapidly with little economic growth.</p>
<h2>Government spending, the economy and the wage bill</h2>
<p>The first key area of debate is whether austerity measures are the best way of stabilising public finances. </p>
<p>Critics of the current plan argue that cutting government spending will reduce economic growth and revenue collection, making the situation worse – not better. There is evidence of this kind of vicious cycle from other countries like <a href="https://thehill.com/opinion/finance/452939-will-we-learn-from-the-greece-austerity-debacle">Greece</a>, the <a href="https://www.lrb.co.uk/the-paper/v37/n04/simon-wren-lewis/the-austerity-con">UK</a> and various African and Latin American countries during the 1980s and 1990s. </p>
<p>But proponents argue that government spending has done little to stimulate growth after the financial crisis, whereas rising debt servicing costs will reduce spending in other areas anyway and the negative consequences of a default on debt repayments are too dire to risk. Here too there are <a href="https://press.princeton.edu/books/paperback/9780691152646/this-time-is-different">many examples</a>, like <a href="https://www.reuters.com/article/argentina-debt-idUSKBN25S4HC">Argentina</a>, of the harmful consequences of not reining in public finances earlier.</p>
<p>A problem that afflicts both groups is that neither has convincing ideas to improve economic growth. This, however, is a bigger problem for those who argue that growth is an alternative to reducing spending.</p>
<p>The second area is, if expenditure cuts are the chosen route, how they should happen. The Treasury’s plan is to target the public service wage bill for most of the cuts, which means either cutting posts or reducing salaries. But fiscal consolidation has already led to a decline in posts with little indication that this was done in a way that prioritised service delivery. </p>
<p>Treasury now proposes to reduce salaries. On the face of it this seems sensible, given the country’s extremely high unemployment rate and shortage of public servants in critical areas. But the fundamental issue is the structure of the public service. </p>
<p>Five years ago I suggested to two senior Treasury officials that a win-win situation would be to cut posts from bloated management structures, reduce manager-level salaries and reallocate those funds to creating lower-paid but valuable ‘frontline’ posts like social workers. That could decrease the wage bill, increase employment and improve service delivery. There was little interest at the time. </p>
<p>Five years later and the Treasury is now starting to talk about doing precisely this. It has intimated that salaries of managers may be cut. And one of the few new funded initiatives allocates R7 billion to teaching assistants. There are good educational arguments for such assistants, but in some countries they have been used to casualise the educational labour force and weaken trade unions. So in both respects the devil will be in the detail. </p>
<p>In principle, a plan based on a political settlement with public sector trade unions remains within Ramaphosa’s power to negotiate. Sizeable cuts to salaries of those at the top of the public sector, broadly defined, will be crucial to get union buy-in. So too should the government consider higher taxes on the wealthy, other high income earners, and profitable companies.</p>
<p>In practice, the lack of progress in the last two years does not bode well. The country cannot afford another failure to implement a credible plan, or the harms of mass action by unions.</p><img src="https://counter.theconversation.com/content/149571/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>South Africa’s National Treasury now proposes to reduce salaries. On the face of it this seems sensible. But the fundamental issue is the structure of the public service.Seán Mfundza Muller, Senior Research Fellow, Johannesburg Institute for Advanced Study, University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/408232015-04-28T20:07:37Z2015-04-28T20:07:37ZWhy the Federal Budget is a textbook policy dilemma<p>A standard principle in economic policy-making is that if you have only one tool, then you cannot achieve two distinct objectives.</p>
<p>The problem for prime minister Tony Abbott is, in fact, even worse: he has one tool to pursue two objectives that are not just distinct, but even conflicting.</p>
<p>The tool is fiscal policy or, more precisely, the combination of expenditure and taxes which generates a certain fiscal balance. Fiscal policy can be either expansionary (that is, more expenditure and/or less taxes) or restrictionary (less expenditure and/or more taxes).</p>
<p>The objectives are (a) ensuring that fiscal position and debt are sustainable (debt stabilisation) and (ii) stabilising the cyclical fluctuations of production and unemployment (output stabilization).</p>
<p>These two things require opposite policies. Debt stabilisation requires a restrictionary fiscal policy. Output stabilisation - given Australia’s current economic outlook - requires an expansionary fiscal policy.</p>
<h2>Bad news from Washington</h2>
<p>The Australian economy is going through a contraction. This has been known for a while.</p>
<p>However, the news here is that this contraction seems to be deeper and longer than expected. This is suggested by the output gap data reported in the World Economic Outlook (WEO) of the International Monetary Fund.</p>
<p>The output gap is the difference between actual GDP and its trend level, expressed in a percentage of the trend. A negative output gap indicates that the economy is below potential; that is, in a contraction.</p>
<p>In the October 2014 issue of the WEO, the output gap in Australia in 2014 was estimated to be -0.095%. This figure has been revised to -1.4% in the <a href="http://www.imf.org/external/pubs/ft/weo/2015/01/weodata/index.aspx">April 2015 issue</a> and projections indicate that the output gap will remain negative in 2015-16. </p>
<p>Australia Bureau of Statistics (ABS) data also show that throughout 2014, Gross Domestic Income (GDI) has grown <a href="http://www.rba.gov.au/statistics/tables/">much less than GDP</a>.</p>
<p>While both GDI and GDP measure output, GDI is statistically more reliable in the short term. Its slow growth is therefore a further indication that the Australian economy is probably weaker than we thought.</p>
<p>At the same time, the WEO data suggests that the government’s fiscal position might also be worse than expected six months ago (see table below for a comparison).</p>
<p>More specifically, the primary balance is now projected to remain negative until 2018, with gross debt increasing above 40% in 2016 and declining no earlier than 2019.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=278&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=278&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79378/original/image-20150427-23972-12favzm.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=278&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<h2>The multiplier effect</h2>
<p>Output contraction calls for expansionary fiscal policy measures.</p>
<p>Some might argue that more expenditure (and/or lower taxes) does not increase output and hence does not help the economy recover from a contraction.</p>
<p>But <a href="https://www120.secure.griffith.edu.au/research/file/dd80d33e-ccac-46f9-ac58-d9ff7d41b5b7/1/2014-08-does-government-expenditure-multiply-output-and-employment-in-Australia.pdf">consider the figure below</a>. It shows the percentage change in Australian GDP over 20 quarters for a 1% increase in government consumption in quarter 0.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=433&fit=crop&dpr=1 600w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=433&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=433&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/79379/original/image-20150427-23942-vjtsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>On impact, GDP increases by 0.16%. The response remains positive in the first year. Afterwards, it becomes statistically not different from zero, but it never turns negative.</p>
<p>The cumulative effect is that output increases by $1.20 for every extra dollar spent on government consumption.</p>
<p>Hence, in Australia, government consumption has a positive multiplier effect. This multiplier effect is the reason why the Australian government should pursue expansionary fiscal policies when facing an economic contraction.</p>
<p>Of course, an increase in expenditure is not exactly what would help the government redress its fiscal deficit. Hence, Abbott and treasurer Joe Hockey have a fiscal policy problem: to expand or to restrict?</p>
<p>If Hockey opts for a fiscal expansion, he will facilitate the recovery, thus putting an end to a period of growing unemployment and uncertainty; but he will have to accept more deficit and debt.</p>
<p>If he chooses a fiscal restriction, he will stop debt from increasing, but will also make the contraction worse. Yes, because the multiplier effect also works in reverse: for every dollar of expenditure cut, Australian GDP decreases by $1.20.</p>
<p>Admittedly, the choice is not easy. Or is it?</p>
<h2>A matter of priorities</h2>
<p>A 40% debt to GDP ratio is not really a problem. It is low by any international standards and well below the threshold above which it might reduce economic growth.</p>
<p>A contraction instead is a problem because it directly affects the welfare of individuals, especially those at the bottom end of income distribution.</p>
<p>A contraction also causes uncertainty, which in turn reduces business confidence and investment, with negative effects on the economy’s long-term growth potential.</p>
<p>Shouldn’t then output stabilisation (that is, facilitating the recovery) have priority over debt stabilisation?</p>
<p>This does not mean that debt should be allowed to grow unchecked. If the government pursues an expansionary fiscal policy in time of contraction, then in time of economic recovery it will have to tighten fiscal policy.</p>
<p>In this way, the deficit generated during the contraction is offset by the surplus realised during the recovery. The result is that the fiscal policy position will be stabilised over the medium term and debt will not accumulate.</p>
<p>The 2015/16 budget provides the government with the opportunity to start implementing this pattern of “counter-cyclical” fiscal policy. But so far there has been little sign the government sees it this way.</p><img src="https://counter.theconversation.com/content/40823/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the continuous piecewise linear model and its macroeconomic applications.</span></em></p>It’s economics 101: to pay down debt, you must restrict spending or raise taxes. To stoke an economy, you’ve got to do the opposite. So which way will this government go?Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/363452015-01-28T19:23:21Z2015-01-28T19:23:21ZThe true state of Queensland debt<p>How much debt is Queensland really in? How much of that debt can past Labor governments bear responsibility for, and has the current Liberal National government cut or added to it? And how does Queensland’s debt compare, both within Australia and up against other countries?</p>
<p>This is an article for anyone wanting to know the answers to those questions and more – including the many readers who requested an explanation on the state’s debt after my recent article on <a href="https://theconversation.com/the-true-state-of-queenslands-economy-without-the-spin-35959">Queensland’s economy</a>.</p>
<p>For those interested in the technicalities of where I got my data from, and why I chose to look at the ratio of debt to Gross State Product, that’s all explained in notes at the end of this article. </p>
<p>But for everyone else, let’s move straight to what the data shows.</p>
<h2>How does Queensland’s debt compare?</h2>
<p>Table 1 below reports the ratio of debt to Gross State Product (GSP) in percentage terms for Australian states and territories over the last 10 years.</p>
<p>As a reference, the bottom of the table also reports the ratio of debt to Gross Domestic Product (GDP) in selected countries of the world. That data refers to general government debt only, and it’s sourced from the International Monetary Fund’s World Economic Outlook.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=355&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=355&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70229/original/image-20150128-12430-14u9lv7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=355&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>What’s clear from that table is that the debt-to-GSP ratio in Queensland has increased considerably since 2006-07, and that most of this increase occurred under Anna Bligh’s Labor governments.</p>
<p>And in comparison to other states, Queensland now has the highest debt-to-GSP ratio.</p>
<p>However, this ratio remains relatively low in comparison to <a href="https://theconversation.com/the-g20-economies-explained-in-12-charts-33887">other G20 countries</a>, including the Australian Commonwealth.</p>
<p>The ratio is also significantly lower than 90%, which some previous studies have identified as the level above which long-term growth is reduced. (You can read more in these <a href="http://scholar.harvard.edu/files/rogoff/files/growth_in_time_debt_aer.pdf">2010</a> and <a href="http://scholar.harvard.edu/files/rogoff/files/w18015.pdf">2012</a> papers from Reinhart and Rogoff.)</p>
<p>But not everyone agrees on that 90% threshold; <a href="http://www.imf.org/external/pubs/ft/wp/2014/wp1434.pdf">other studies</a> have failed to identify any threshold and conclude that there is no relationship between debt and growth.</p>
<p>Another important point is that the 90% threshold is estimated from cross-country data on national or federal debt. The threshold at state level might be lower than 90% – but no conclusive estimates are yet available in the literature.</p>
<p>In other words, working out how much debt Queensland has is the simple part; deciding whether that debt is too high, about right, or quite low, remains a much more subjective matter.</p>
<h2>Is all debt bad?</h2>
<p>So perhaps a simple comparison of debt ratios is not the best way to assess the extent of the problem. </p>
<p>In fact, debt is not always bad and the objective of fiscal policy cannot simply be the minimisation of debt levels.</p>
<p>That’s not a sentiment you’re likely to hear either Queensland Premier Campbell Newman or Labor leader Annastacia Palaszczuk express between now and Saturday’s polling day. Yet that is something we should all be able to agree on.</p>
<p>If a government borrows to finance investment and/or to help the economy overcome a bad cyclical contraction, then a certain level of debt is not just acceptable, it’s arguably desirable.</p>
<p>In the end, debt is a tool that governments should use to achieve fundamental goals like growth and welfare. The fact that in Queensland debt is higher than, say, New South Wales is not, in itself, enough to conclude that Queensland has a debt problem.</p>
<p>The more relevant question for us to consider is then whether the debt level is sustainable or not. And that means looking at whether or not the debt-to-GSP ratio is likely to climb too rapidly in future.</p>
<h2>You can’t evaluate debt without growth</h2>
<p>In this regard, three factors determine the evolution of the debt-to-GSP ratio: the interest paid on the existing stock of debt, the rate of GSP growth, and the primary balance (which is the budget balance after the government has made its interest payment).</p>
<p>If the primary balance is zero (that is, revenues are equal to expenditures after accounting for the interest payment), then debt is sustainable as long as the rate of growth is not smaller than the interest rate on debt.</p>
<p>When growth is higher than the interest rate, then the government can even run a limited primary deficit and debt would still be sustainable.</p>
<p>A numerical example with numbers that approximate the current situation of Queensland might help understand the importance of economic growth for the purpose of sustainability.</p>
<p>Given an initial debt-to- GSP ratio of 25% and a nominal interest rate of 5.5%, a nominal growth rate of 7.5% is enough to maintain the debt-to-GSP ratio, constant even with a primary deficit of 2%.</p>
<p>With inflation at, say 3%, a nominal growth of 7.5% is equal to a real growth rate of 4.5%, which incidentally is very close to the average annual real growth rate in Queensland over the period June 1991 to June 2012.</p>
<p>So, more than an issue of reducing the absolute level of borrowing, sustainability is a matter of economic growth. An economy that grows is an economy that can sustain its debt.</p>
<h2>Where could Queensland debt end up?</h2>
<p>Let’s consider a few different scenarios to show how much different government approaches would cut Queensland’s debt.</p>
<p>Suppose that economic and fiscal conditions – that is, the growth rate, interest rate and primary balance – in Queensland over the next 10 years were the same as it has been under the current LNP government. Where would debt be by 2023-24? The answer is 58% of GSP.</p>
<p>If we repeat the exercise using the economic and fiscal conditions that occurred under the first of the two Bligh governments, then the answer would be 49%. With the conditions of the second Bligh’s government, the debt-to-GSP ratio would be higher, at 62%.</p>
<p>A government that was able to eliminate the primary deficit, but delivered the same rate of growth as the Newman government, would still produce a debt-to-GSP ratio of 51% by 2023-24.</p>
<p>The chart below shows the projected debt trajectories under all those different scenarios, starting from the current level of debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=358&fit=crop&dpr=1 600w, https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=358&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=358&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=449&fit=crop&dpr=1 754w, https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=449&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/70230/original/image-20150128-12455-szuw30.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=449&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Bligh I – meaning the first term of the Bligh Labor government – was characterised by a higher primary deficit and interest rate than Newman, but the growth rate was also significantly higher. It is indeed this higher growth rate that in the simulation moderates the increase in the debt-to-GSP ratio.</p>
<p>In fact, the chart shows that in terms of stabilising the debt-to-GSP ratio it is better to have a limited primary deficit and grow fast than to have zero primary deficit and grow slowly.</p>
<p>This does not mean that the Queensland government (or any other government) should permanently run a deficit. Quite the contrary: the best way to avoid a debt problem is to alternate deficits in time of recession with surpluses in time of expansion.</p>
<p>However, it does mean that in the pursuit of debt stabilisation, a government should not make choices that cause sharp fiscal restrictions when the economic outlook is fragile or that compromise the state’s long-term growth potential.</p>
<p><em><strong>Technical notes</strong></em></p>
<p><em>To measure debt levels, I primarily used data from the Australian Bureau of Statistics (ABS), 55120.</em></p>
<p><em>The latest release of this data was in 2014 and the figures are reported up until fiscal year 2012-13. For Queensland (and a few other states), the data for 2009-10 and 2010-11 are not reported. For these years, I referred to the Mid-Fiscal Year Review (various years). I also used those Mid-Fiscal Year Reviews to extend the data to 2013-14.</em></p>
<p><em>The aggregate I considered was the “Borrowing” of the Non-Financial Public Sector, which includes the General Government and Non-Financial Public Corporations.</em></p>
<p><em>Then I scaled debt data to Gross State Product (GSP). In some analyses, debt is scaled to a variable like tax revenues, but this is not entirely appropriate as borrowing is a stock measure, while tax revenues is a flow measure. Moreover, Gross State Product is the scaling factor commonly adopted in the academic and professional discussion on debt.</em></p>
<hr>
<p><em>Read more of The Conversation’s <a href="https://theconversation.com/au/topics/queensland-election-2015">Queensland election 2015</a> coverage.</em></p><img src="https://counter.theconversation.com/content/36345/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the continuous linear piecewise model and its macroeconomic applications.</span></em></p>How much debt is Queensland really in? How much of that debt can past Labor governments bear responsibility for, and has the current Liberal National government cut or added to it? And how does Queensland’s…Fabrizio Carmignani, Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/210032013-12-02T19:30:50Z2013-12-02T19:30:50ZDebt ceiling is a belt when we already have braces<figure><img src="https://images.theconversation.com/files/36600/original/krvy642q-1385950688.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australia's debt level is currently pegged at A$300 billion, but should the debt belt be tightened or dropped altogether?</span> <span class="attribution"><span class="source">John Pryke/AAP</span></span></figcaption></figure><p>The Australian Parliament is deadlocked on a bid by the government to increase the debt ceiling from A$300 billion to A$500 billion.</p>
<p>The Greens have <a href="http://www.smh.com.au/federal-politics/political-news/greens-begin-negotiations-with-joe-hockey-on-scrapping-debt-ceiling-20131202-2ykg9.html">flagged</a> a willingness to drop the ceiling entirely, in exchange for increased transparency on how government debt is being spent.</p>
<p>The whole notion of a debt ceiling is a new one, introduced by Labor during the financial crisis to provide scope to quickly increase borrowings if it were necessary. It is not really needed since Parliament already approves spending. The debt ceiling adds a belt when we already have braces.</p>
<p>In any sort of crisis, the ability of the government to borrow and use the funds to increase spending within the economy is a very important shock absorber. But of course since the borrowings have to be paid back with interest, it is simply a transfer which increases short-term spending to provide an immediate boost. Wars for example are often funded mainly by borrowing.</p>
<p>Government borrowing for other purposes is less justifiable. At the moment governments are being urged to borrow to invest in infrastructure. Such investment really needs to be heavily tested to check that the benefits generated by the investment will pay for the debt being raised. This sort of borrowing is particularly fraught since you and I enjoy the benefits of the investment but our children have to pay down the debt. So borrowing for infrastructure can be justified but as taxpayers and parents we should approach it with a sceptical mindset.</p>
<p>There are cases where increased public debt can be a good thing. But every time the government borrows more in any year than it is paying off, the overall level of public debt rises.</p>
<p>Since the financial crisis we have all become more sensitive to the overall level of public debt. It seems clear that governments in countries like Greece will never be able to levy enough taxes to pay down their debt. It will continue to default, by either not paying its lenders or by subterfuges such as lowering the interest rate it will pay below the rate at which the loan was written. </p>
<p>By getting itself into a hole like this Greece has given up its sovereign power to its lenders. The lenders are now making policy decisions that should be the exclusive right of the Greek parliament.</p>
<p>Australia is a long way away from that problem. In fact we have a relatively low level of debt by global standards. So our current level of debt does not threaten our sovereignty.</p>
<p>Spain and Italy have a different problem from that faced by Greece. They are still able to service their borrowings. But they do have to pay a much higher interest rate than other countries because their lenders are worried about their tendency to run deficits year after year. Lenders fear they are on the path the insolvency. The effect is that more of Italian and Spanish people’s taxes are going to pay off the higher interest rate than would be the case if they had a lower level of debt. In Australia some states have higher borrowing costs than others for exactly this reason.</p>
<p>Again the Australian government does not face this problem at present. So the Australian argument is about politics and political philosophy rather than any immediate concern about our level of debt. </p>
<p>But since we have a ceiling, it really does need to be raised. On current projections the debt will rise to about A$370 billion and it is clearly prudent to establish a ceiling above that. This is sensible since we really do not know what sort of emergency might arise which requires expansion of the debt.</p>
<p>The deeper argument is about political philosophy. Politicians like spending our money, and the problem we face as taxpayers is how to stop them. Negotiations over the debt ceiling in the US have focused attention on the tendency of debt to rise year by year, or for governments always to run deficits. France for example has not run a surplus since 1974.</p>
<p>Just as some people deliberately keep their credit card limits small in order to control their own lending, a borrowing limit may well be a good thing to provide some counterbalance to the politicians’ desire to spend our money. While it will always be politically inconvenient for the government in power, this is probably a healthy debate for our democracy.</p>
<p>This is not a trivial problem. Australia accumulated public debt in excess of the Greek levels by the Second World War. This was the result of a long period of public investment (in railways, water, ports etc), and a series of shocks (recession in the 1890s and 1930s, financing World Wars I and II), which made it hard to sell down debt. Much of it was owned to foreigners. </p>
<p><strong>Australian public debt as a % of GDP</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/36595/original/qmzssyhz-1385948357.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Source: Maddock, Rodney, Banks, Capital Markets and Australian Economic Development (April 30, 2013). Available at SSRN: http://ssrn.com/abstract=2258843 or http://dx.doi.org/10.2139/ssrn.2258843. The Barnard data is in the Bicentennial Statistics volume.</span>
</figcaption>
</figure>
<p>It then took Australia 40 years to pay down the debt to reasonable levels. Private savings were effectively repressed for forty years, mainly through negative interest rates, which diverted private savings into paying down public debt.</p>
<p>We may not need a debt limit, but having an ongoing debate about public debt is necessary and desirable to keep the political class honest.</p><img src="https://counter.theconversation.com/content/21003/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Australian Parliament is deadlocked on a bid by the government to increase the debt ceiling from A$300 billion to A$500 billion. The Greens have flagged a willingness to drop the ceiling entirely…Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/178922013-09-06T04:45:31Z2013-09-06T04:45:31ZExplainer: the role of budget deficits<figure><img src="https://images.theconversation.com/files/30842/original/kqhws773-1378430344.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Servicing the current level of public gross debt is not a problem for Australia</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>There continues to be a great debate around Australia’s fiscal position. Yet, budget deficits are, in fact, a natural outcome of the business cycle. In a <a href="http://www.melbourneinstitute.com/downloads/policy_briefs_series/pb2013n05.pdf">policy brief</a>, co-authored by myself and colleagues Dr Edda Claus, Dr Viet Nguyen and Dr Michael Chua, we argue that deficits are crucial in their function as fiscal stabilisers, and help to counter the negative effects associated with market downturns.</p>
<p>Australia’s public gross debt to GDP ratio of 33% is low compared to other countries. In 2012, the OECD average in 2012 stood at 109% of GDP, and countries with gross debt as a share of GDP in excess of 100% included: </p>
<figure><table><thead><tr><th>Country</th><th>Debt (as a share of GDP)</th></tr></thead><tbody><tr><td>Japan</td><td>219%</td></tr><tr><td>Greece</td><td>166%</td></tr><tr><td>Italy</td><td>140%</td></tr><tr><td>Portugal</td><td>139%</td></tr><tr><td>Ireland</td><td>123%</td></tr><tr><td>United States</td><td>106%</td></tr><tr><td>United Kingdom</td><td>104%</td></tr></tbody></table></figure>
<p>The general reason to be concerned about deficits is that public debt, like all types of borrowings, has to be serviced. Interest is charged on the amount borrowed and interest charges need to be paid to avoid being caught in the trap of borrowing to pay off borrowings. However, servicing the current level of debt is not a problem for Australia, as net government interest payments as a share of GDP has been below 0.5% since 2001.</p>
<p>When considering whether a budget deficit is cause for concern, it is important to remember that budget balances are generally cyclical. Surpluses tend to occur and rise during times of strong GDP growth when receipts are up and government expenditures are down. Deficits, on the other hand, tend to occur and rise during times of economic slowdowns because receipts fall (driven by declines in income tax due to job losses) and expenditures rise (driven by increased unemployment insurance claims, again due to job losses). </p>
<p>Fiscal deficits are thus natural outcomes of business cycles and are important economic mechanisms that help moderate booms and busts. These automatic fiscal stabilisers counter the negative effect of job losses on consumption and mitigate the fall in GDP through increased unemployment and welfare payments.</p>
<p>Another reason to avoid fixation on the size of deficits in an environment of low growth is the potential tension with monetary policy. </p>
<p>In this regard, monitoring the budget deficit is crucial because it is also about monitoring the stance of fiscal policy. Monetary policy in Australia is currently geared towards stimulating the economy. In contrast acting to decrease the deficit in a climate of low growth is equivalent to adopting a tight fiscal policy. </p>
<p>This means that both levers of policy are now working in opposite directions — tight fiscal policy and loose monetary policy. To use the analogy of driving a car – one foot is stepping on the accelerator while the other foot is stepping on the brake! The outcome for the economy, as in a car, is that both actions cancel each other and, just like a car, the longer it is done the greater the likelihood of damage.</p>
<p>Operating a budget deficit is difficult at the best of times, and operating a deficit during an economic slowdown is especially difficult as closer scrutiny is paid to the components of revenues and expenditures. The view presented within our study is one that argues deficits need to be sustainable. </p>
<p>Deficits also reflect fiscal policy surrounding taxes and expenditures and as such should coordinate with monetary policy (not contradict it, as when the stance of fiscal policy is contractionary while the stance of monetary policy is expansionary).</p>
<p>Deficits do not, necessarily, need to be converted to surpluses. Deficits have an important role to play in stabilising the state of the economy by mitigating against unnecessary hardships associated with downturns. Conversely, surpluses are opportunities for safeguarding the economy. </p><img src="https://counter.theconversation.com/content/17892/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Guay Lim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There continues to be a great debate around Australia’s fiscal position. Yet, budget deficits are, in fact, a natural outcome of the business cycle. In a policy brief, co-authored by myself and colleagues…Guay Lim, Professorial Fellow, Deputy Director, Melbourne Institute of Applied Economic and Social Research , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/167162013-08-12T20:21:47Z2013-08-12T20:21:47ZFactCheck: how strong is Australia’s economy?<figure><img src="https://images.theconversation.com/files/29101/original/w7q67c7v-1376347619.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How does Australia's economy stack up when compared globally?</span> </figcaption></figure><blockquote>
<p><strong>“We have among the lowest of budget deficits and debt to GDP of any other major economies in the developed world… If it’s so bad, Mr Abbott, why have we been given by the three ratings agencies a AAA credit rating?” - Prime Minister Kevin Rudd, <a href="http://www.abc.net.au/am/content/2013/s3817899.htm">ABC’s AM program</a>, 5 August.</strong></p>
</blockquote>
<p>The Prime Minister has said many times that Australia has a low budget deficit and debt to GDP compared with other major economies, and pointed to Australia’s AAA rating as evidence of a strong economy. But how accurate are those claims?</p>
<p>As Rudd explicitly compares Australia to other major economies, it is necessary to use a multinational database that guarantees cross-country comparability and consistency of statistical information. For this reason, the <a href="http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/index.aspx">International Monetary Fund (IMF) World Economic Outlook Database</a> from April this year is chosen as the primary data source.</p>
<h2>How much debt does Australia have?</h2>
<p>Net debt to gross domestic product (GDP) ratio is a way of counting how much national debt a country has when compared with the total value of the economy, as measured by GDP. It is used as one indicator of the economic sustainability of a country’s debt.</p>
<p>Chart 1 shows the latest IMF data on how net debt to GDP has changed since 1995, with Australia’s performance charted in comparison to other economies including the Group of 7 nations, the European Union, the Euro Area nations (which only includes the countries that have the Euro as a currency), and a grouping of more than 30 “advanced economies”, including Canada, Germany, Hong Kong, Israel, New Zealand, the United Kingdom and the United States.</p>
<p>From 2013, the figures shown in Chart 1 are estimates. These are the best and most current comparable figures on net debt available - although as I will discuss shortly, it is important to consider the IMF forecasts in the light of the recently revised Australian Treasury forecasts.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/28730/original/9527v4zd-1375750728.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Chart 1: Net Debt to GDP ratio in Australia and comparison country groupings.</span>
<span class="attribution"><span class="source">Source: IMF, World Economic Outlook Database</span></span>
</figcaption>
</figure>
<p>In 2012, Australia’s net debt to GDP ratio was 11.6% (that is, our net debt was equivalent to 11.6% of our GDP) and it is expected to increase to 12.7% in 2013. This is very close to the figure (13%) mentioned by the Prime Minister in his interview.</p>
<p>As Chart 1 also shows, the Australian net debt to GDP ratio is low by international standards. The average for the Euro Area in 2012 was 71.9%, lower than the figure reported by the Prime Minister (90%), but still more than six times higher than the debt level in Australia.</p>
<p>Out of 26 advanced major economies for which net debt data are available in 2012, Australia had the sixth lowest net debt to GDP ratio (including countries that reported a negative net debt).</p>
<p>Chart 1 also indicates a worldwide increase in debt ratios since 2008. This increase was largely due to the expansionary fiscal policies (a combination of tax cuts and higher public expenditure) that many countries adopted in response to the Global Financial Crisis. </p>
<p>According to the IMF estimates, Australia is expected to be able to arrest that increasing debt after this year and to reduce the ratio by 7 points of GDP by 2018. This projected decline is larger than the average projected decline in the comparison countries.</p>
<p>However, the consolidation of Australian budgetary position may be slower than initially expected in view of the Labor’s government <a href="https://theconversation.com/labors-economic-statement-brings-deeper-and-longer-deficit-16665">weaker-than-expected economic statement</a> last week, which showed higher deficits and higher unemployment than forecast in the May budget. (You can read the <a href="http://www.budget.gov.au/2013-14/content/economic_statement/download/2013_EconomicStatement.pdf">official economic statement here.</a>) </p>
<p>Explaining the decision to cut interest rates last week, <a href="http://www.rba.gov.au/media-releases/2013/mr-13-15.html">Reserve Bank Governor Glenn Stevens also observed</a>: “In Australia, the economy has been growing a bit below trend over the past year. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher.”</p>
<p>However, Stevens did put Australia’s position into a global perspective, noting that: “Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year”.</p>
<h2>How do Australia’s public finances look?</h2>
<p>Table 1 provides some details on public finances in Australia and Europe over the period 2008-2012, as well as some indication of expected future trends (the figures from 2013 on are estimates).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=323&fit=crop&dpr=1 600w, https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=323&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=323&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=406&fit=crop&dpr=1 754w, https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=406&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/28741/original/mwvgwbvv-1375755129.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=406&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Table 1: Fiscal position of Australia compared to Euro Area and European Union averages. Budget balance means revenue minus expenditure. Primary balance means budget balance plus interest on debt. All figures are % of GDP.</span>
<span class="attribution"><span class="source">Source: IMF, World Economic Outlook. Estimates start after 2012.</span></span>
</figcaption>
</figure>
<p>A combination of a decrease in revenue and an increase in expenditure pushed Australia’s budget balance to a record of -4.7% of GDP in 2010. (The budget balance is equal to revenue minus expenditure, therefore a figure of -4.7% means that the deficit amounted to 4.7% of GDP.) However, the peak of deficit in Europe was significantly higher.</p>
<p>In 2012, Australia’s budget balance was -2.95% of GDP, compared to -3.59% in the Euro Area, -4.14% in the European Union, and -5.91% in the advanced major economies (not shown in Table 1).</p>
<p>Out of 34 advanced major economies for which fiscal balance data are available in 2012, Australia had the 13th lowest deficit (including countries that reported a surplus). </p>
<h2>What’s a AAA credit rating worth?</h2>
<p>Credit ratings are designed to help investors judge governments and businesses’ ability to meet their financial commitments - and AAA is the top rating available.</p>
<p>In this AM interview, as well as at <a href="http://www.kevinrudd.org.au/latest3_040813">his election campaign launch</a>, the Prime Minister asked a rhetorical question about why Australia would have been given a AAA credit rating by [the major credit agencies](http://en.wikipedia.org/wiki/Big_Three_(credit_rating_agencies) if the economy was not strong. </p>
<p>In fact, there is some debate among economists about the reliability of credit ratings. In the aftermath of the Global Financial Crisis, rating agencies were criticised for their inability to correctly see through the junk financial products that eventually led to the collapse of several financial institutions.</p>
<p>More recently, some observers have argued that the credit rating agencies were slow to <a href="http://www.cnbc.com/id/44039103">downgrade the world’s largest economy</a>, the US, despite <a href="http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/">the US Federal Reserve spending trillions</a> on bailouts during the GFC. Others argue that their assessment of some European economies’ rating has been at times inconsistent and not always linked to the underlying economic fundamentals.</p>
<p>Opposition finance spokesman Andrew Robb echoed some of that criticism recently <a href="http://www.abc.net.au/newsradio/content/s3810446.htm">when he said on ABC News Radio</a>:</p>
<blockquote>
<p>“I remind you that Lehman Brothers, the collapse of Lehman Brothers, which started this global financial crisis, on that very day, they still had a AAA credit rating… You can’t place enormous store in the rating agencies. They do get things very badly wrong”.</p>
</blockquote>
<p>It might therefore be argued that having a AAA rating does not necessarily say everything about the economic conditions of a country. </p>
<p>Still, not many countries can currently claim to have a AAA rating - and all of those that do appear to be in strong economic and financial conditions.</p>
<p>Perhaps a better way to assess the strength of Australian economy is to look directly at the dynamics of macroeconomic indicators. For this purpose, Table 2 summarises current and future expected levels of some key economic indicators for Australia and other countries with a AAA rating.</p>
<p>Unlike Australia, the US and UK have been downgraded from AAA to AA+ by some ratings agencies, but they are included in this table for comparison, together with the averages of the group of major advanced economies. </p>
<p>Again, a note of caution is in order here since projections are continuously updated.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=342&fit=crop&dpr=1 600w, https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=342&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=342&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=429&fit=crop&dpr=1 754w, https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=429&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/28743/original/k2vhyf9t-1375755392.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=429&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Table 2: Key economic indicators in Australia and other AAA countries. Units shown: ‘Growth’ is % change in real GDP; ‘Inflation’ is % change in consumer price index; ‘Unemployment rate’ is % of labour force; ‘Current account’ is % of GDP.</span>
<span class="attribution"><span class="source">Source: Author’s calculations based on data from the IMF, World Economic Outlook Database</span></span>
</figcaption>
</figure>
<p>With an average annual growth rate of GDP projected around 3% over the next five years, Australia is among the fastest growing economies of the group. This is true even when looking at the revised GDP growth figure announced by the Treasury (2.5% growth in 2013-14 and 3% from 2014-15 onwards) </p>
<p>Unemployment is lower in Australia than in most other AAA countries - and would continue to be even if it rises as forecast to 6.25% next year. Conversely, inflation is higher than in the other countries in the sample, including the UK and US, but still below 3%.</p>
<p>Australia’s <a href="http://en.wikipedia.org/wiki/Current_account_deficit">current account</a> balance is expected to deteriorate. This might reflect a number of factors: growing investment in the resource sector, increasing mining-related imports, and progressive normalisation of terms of trade and interest rates on external borrowing.</p>
<h2>Verdict</h2>
<p>The data indicates that the Prime Minister’s statement about the debt position of Australia is correct. The economy is doing relatively well by international standards. The new information recently released by the Treasury depicts a somewhat softer short-term outlook, but it does not substantially change the overall positive assessment of Australian economic performance in the global context. </p>
<hr>
<h2>Review</h2>
<p>This article is a fair and reasonable examination of the evidence. I think it provides a cogent assessment of the Prime Minister’s claim. <strong>- Graham White.</strong></p>
<p><div class="callout">The Conversation is fact checking political statements in the lead-up to this year’s federal election. Statements are checked by an academic with expertise in the area. A second academic expert reviews an anonymous copy of the article.Request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/16716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Carmignani receives funding from the Australian Research Council for a project on the estimation of the piecewise linear continuous model and its macroeconomic applications.</span></em></p><p class="fine-print"><em><span>Graham White does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“We have among the lowest of budget deficits and debt to GDP of any other major economies in the developed world… If it’s so bad, Mr Abbott, why have we been given by the three ratings agencies a AAA credit…Fabrizio Carmignani, Associate Professor, Griffith Business School , Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/139872013-05-09T02:35:25Z2013-05-09T02:35:25ZDebts and deficits: why a string of deficits does not necessarily spell the end of the world<figure><img src="https://images.theconversation.com/files/23337/original/9nb7bkfv-1367976263.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What is the "optimal" level of public debt? Persistent deficits do not automatically lead to a situation where the government resembles a household under mortgage stress.</span> </figcaption></figure><p>The debate about long-term public finance and the role of government is one that is most definitely needed. However, there are two aspects to this debate that are often conflated.</p>
<p>First, there is the issue of a sustainable public debt to GDP trajectory. It is here that the issue of the optimum size of the budget balance and whether deficits are sustainable in any sense arises.</p>
<p>The second aspect of debate about public finance and the role of government is the composition of the budget: the mix of expenditures and revenues required to achieve budget targets – be they deficits or surpluses – consistent with sustainable debt ratios.</p>
<p>As to the first of these – a sustainable debt trajectory – the first thing to note is that the time-path of the debt to GDP ratio depends on four things: the size of the budget balance (whether surplus or deficit) and whether the government needs to issue more debt in response to the budget; the starting level of debt; the interest rates effectively payable on the debt; and the growth rate of the economy.</p>
<p>For a sufficiently small debt-to-GDP ratio and a plausible range of interest rates payable on the debt and growth rates of the economy, the debt will not grow faster than GDP so that the debt ratio remains constant over time or declines, even with persistent budget deficits.</p>
<p>Indeed, as one economist, Luigi Pasinetti, <a href="http://ideas.repec.org/a/oup/cambje/v22y1998i1p103-16.html">noted some years ago</a>,: “It is possible to remain [in a situation] where the public debt is either constant or decreasing [as a proportion of GDP], even with a permanent public deficit, provided that GDP growth is positive.” </p>
<p>Persistent deficits — either before interest payments on debt are taken account (economists call this the primary budget balance) or after they are taken into account need not lead to an outcome where the government resembles a household under mortgage stress.</p>
<p>This is the flawed analogy often used in political debate— and it needs to be roundly knocked on the head. A primary budget surplus or even balanced budget is not always a necessary condition for public debt to stabilise or fall as a proportion of GDP. This really does depend on the four factors referred to above.</p>
<p>Pasinetti also noted that the “optimal” amount of public debt as a proportion of GDP is not something that economists can pinpoint. </p>
<p>Economists can tell you the conditions under which the debt will or will not grow faster than GDP. But there is no economic argument – certainly that I’m aware of – which points to 30% debt to GDP being less desirable that 15%, for example. Nor is there an economic justification for the nonsensical default view that has underpinned political discussion in this country for many years: that the best public debt is no debt.</p>
<p>The desirable debt ratio must be considered in light of the kinds of economic and social infrastructure that are funded through that debt. In other words, the optimal debt level is much more than just an economic decision.</p>
<p>However, there is a qualification to be made here. There is a view put by Keynes many years ago that the recurrent side of the budget should be balanced, while deficits — if needed — should be left to capital expenditure side of the budget. Part of this view is the notion that the returns on the capital expenditures — both economic and social — take place in a longer timeframe.</p>
<p>For Keynes, this was also about ensuring public investment was free to meet any deficiency between investment that the private sector wanted to undertake and the level required to bring an economy to full employment.</p>
<p>So,although the overall size of a budget balance and its time profile may not be inconsistent with constant or falling long-term public debt to GDP ratio, a government may face difficult financing issues in funding burgeoning recurrent expenditures.</p>
<p>If, for example, the implications for recurrent funding of an NDIS or Gonski school reforms are likely to exceed revenue projections, questions of creating additional revenue streams or of cutting in other areas of recurrent expenditure may appear prudent.</p>
<p>And herein lies the second aspect to the debate about public sector financing: revenue versus expenditure.</p>
<p>A not-so-subtle theme in much discussion in this country for a long time has been a predilection for expenditure cuts in favour of tax changes. This reflects some fundamental views about how the economy works – views, which, in the view of the present author, are erroneous.</p>
<p>Clearly, there are also matters of equity at stake in the revenue and expenditure mix: that expenditure on social infrastructure (as embodied in the NDIS or Gonski) and increasing of taxes or imposition of levies to finance these measures involve justifiable redistributions.</p>
<p>Leaving equity issues aside though, even on economic grounds there is little or no justification for seeing budget difficulties – to the extent they are difficulties – as symptomatic of excessive expenditure rather than insufficient revenue.</p>
<p>This can only be justified on the grounds that government expenditures either capital or recurrent in and of themselves somehow lead to a diminution of wealth in the economy, which more than offsets the social benefit which might arise from the provision of government services.</p>
<p>It is a view that ignores the most basic economic concepts about how income and economic activity are generated in an economy like ours, and that governments are as capable as the private sector of generating effective demand and growth. Such a view too often also ignores a need for the revenue system to be one that serves society’s economic and social needs, rather than a plaything of the private sector.</p><img src="https://counter.theconversation.com/content/13987/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Graham White does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The debate about long-term public finance and the role of government is one that is most definitely needed. However, there are two aspects to this debate that are often conflated. First, there is the issue…Graham White, Associate Professor, School of Economics, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/137532013-04-30T20:05:22Z2013-04-30T20:05:22ZWhy deficits leave us ill-prepared for future shocks<figure><img src="https://images.theconversation.com/files/23048/original/w7f784z9-1367299733.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While the blame game for the deficit continues, the economy remains vulnerable to future turbulence.</span> <span class="attribution"><span class="source">AAP/ Alan Porritt</span></span></figcaption></figure><p>Labor has said all options are on the table to address Australia’s structural deficit and falling tax revenues, following disclosure this week of a $12 billion revenue shortfall, just weeks from the federal budget. </p>
<p>Political debate has centred around whether this has been a revenue problem - as argued by Treasurer Wayne Swan - or a spending problem, as claimed by Tony Abbott - and which government was responsible: Howard and Costello, or Rudd and Gillard. </p>
<p>Irrespective of all of this, it is important to steer the economy back to balanced budgets. Why? </p>
<p>Unless this spending path is broken, Australia could risk an unpleasant speculative attack on its currency at some point in the future. And it risks having little to fall back on if economic conditions substantially worsen.</p>
<p>Australia’s budget has been in deficit since the onset of the global financial crisis in 2008. No serious corrective course of action has been taken to reduce it - even though deficits are usually run in recessions, not during an unprecedented mining boom.</p>
<p>Simply, it would have been much better if the government had saved up for a rainy day so that it would have the means available to stimulate the economy in times of economic weakness without being forced down the austerity path when it is the least desirable. </p>
<p>Regardless of prevailing economic conditions, future government budgets will be facing additional challenges posed by the retiring Baby Boomer generation, which will place additional burdens on public expenditure with increasing pension outlays and health care commitments over the next decades. On the revenue side, the picture is not looking too good either. </p>
<p>Income-related taxes, the main source of government revenue, are not likely to grow at the pace we have seen over the past two decades, as the growth effects from the booms in mining and university graduates level out. </p>
<p>Furthermore, revenues from stamp duties on housing purchases, which are an important source of income for state governments, are likely to remain low in the future, as the trend in housing prices and turnover in the housing market <a href="http://www.rba.gov.au/speeches/2013/sp-ag-140313.html">points downward</a>. This will have knock-on effects for the federal budget as states may demand a greater share.</p>
<p>An argument for not reducing the government deficit is that a contractionary fiscal policy would reduce demand and create unemployment. </p>
<p>How credible is this thesis? According to simple textbook Keynesian analysis, a decrease in government spending of 10% reduces income by more than 10% because the initial spending cuts lead to subsequent private sector spending cuts and, therefore, to additional demand contraction. From this analysis, it follows that government spending is influential for GDP and that any fiscal tightening (reduction in government spending) would reinforce any economic downturn.</p>
<p>However, this simple analysis is misleading. First, private saving, to a large extent, counterbalances public savings. In other words, the private sector responds to public sector deficits by increasing their savings because they know that the government debt has to be paid back in the future and because government deficits are often associated with uncertainty and macroeconomic mismanagement. </p>
<p>Second, the interest rate on government debt can increase suddenly if the financial markets consider the government’s policy to be unsustainable. As we have seen in southern Europe, this can usher the economy into a downward spiral.</p>
<p>Take a hypothetical example. Suppose that the government debt-GDP ratio climbs to 50% and that the interest rate increases by six percentage points, due to an increase in the risk premium. That will automatically add three percentage points to the government deficit as a percentage of GDP.</p>
<p>Third, if the situation gets too grave, Australia could experience capital flight, an unpredictable event driven by sentiment, rumour and irrational exuberance in the financial markets. </p>
<p>Fourth, the GFC was an outcome of a massive increase in private debt exposure fuelled by easy access to credit at low cost and a booming housing market. Trying to keep the spending bubble up through deficit spending, although practised in the US, France and Japan, is an absurd policy. Australia’s private debt-GDP ratio needs to be reduced before the government should continue its deficit spending.</p>
<p>It can be argued Australia is on an sustainable government debt path. After all, Australia’s government debt is around 27% of GDP, a comparatively low figure relative to other rich countries.</p>
<p>However, this misses the fact that the private sector is already very indebted. The ratio of credit to the private sector and GDP is currently around 150%, well in excess of its sustainable level and this, in the worst case scenario, could lead to a capital flight with potentially dire consequences for the Australian economy. </p>
<p>Furthermore, my calculations indicate the government debt-GDP ratio is likely to increase to 50 to 100% over the next 10 years if the current deficit spending is maintained.</p>
<p>A further danger is that the debt-GDP ratio could suddenly increase if there were to be a severe economic downturn. In the period 2007-2012, Ireland’s debt-GDP ratio increased by <a href="http://www.imf.org/external/pubs/ft/survey/so/2011/num020211a.htm">92 percentage points</a>. In the same time, debt-GDP ratio jumped by 63% in Greece, 57% in Japan, 54% in the UK and 42% in the US. </p>
<p>It can be argued the economic circumstances prevailing in Australia make it unlikely that we would go down this route. </p>
<p>But the examples do show the situation can go downhill very quickly, particularly if the economy is on the wrong track. </p>
<p>Government policy needs to be mindful of these possible future pitfalls. It makes sense to rein in government spending to ensure there are reserves available to deal with any future negative shocks.</p><img src="https://counter.theconversation.com/content/13753/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jakob Madsen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Labor has said all options are on the table to address Australia’s structural deficit and falling tax revenues, following disclosure this week of a $12 billion revenue shortfall, just weeks from the federal…Jakob Madsen, Xiaokai Yang Professor of Business and Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/132452013-04-10T20:41:39Z2013-04-10T20:41:39ZThe truth behind our ‘dangerous’ public debt levels<figure><img src="https://images.theconversation.com/files/22215/original/wdhcvvxx-1365477788.jpg?ixlib=rb-1.1.0&rect=16%2C70%2C950%2C820&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While the Coalition has criticised Australia's public debt levels, it is the country's private debt that is the big issue.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent <a href="http://mpegmedia.abc.net.au/newsradio/audio/20130404-robb.mp3">ABC radio interview</a>. During the interview, Robb claimed growth in public debt was excessive and unsustainable, and accused Treasurer Wayne Swan of improperly representing the government’s current position on the public debt.</p>
<p>That public debt may constitute a problem is a familiar refrain from the conservative side of politics and economics. Many no doubt remember Howard and Costello’s incessant criticisms of the Keating government’s management of public finances when they took power in 1996, blaming them for being bad economic managers. The Coalition government certainly hasn’t let Labor forget this.</p>
<p>When discussing public debt, it makes sense to compare it to the size of the economy, or GDP (Gross Domestic Product). Quoting absolute figures is not sufficient to understanding the scale of any debt (see here for a <a href="http://www.brisbanetimes.com.au/opinion/politics/cure-for-a-bloated-public-sector-20130404-2h9f8.html">bad example</a>). GDP represents the size of a country’s income, though, of course, governments can only commandeer a portion of that income through taxation. The following figure displays the commonwealth government’s debt since Federation.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22189/original/yxpcqcrr-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>In its first decade, the government had no debt before piling it on to finance Australia’s involvement in World War I. The period 1914 to 1918 represented the largest growth period by far in federal government debt (the second largest occurred in 2009 to combat the effects of the Global Financial Crisis). Interestingly, debt decreased between 1931 and 1937 in absolute terms, certainly the incorrect policy response to an economic depression.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22190/original/mz9vh654-1365426170.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The ratio jumped once more due to World War II, to a record peak of 104% in 1946. A combination of solid repayment and strong GDP growth resulted in the rapid fall of the ratio to a low of 7% in 1974. The ratio would’ve likely fallen even further if not for the mid-1970s recession, requiring the government to debt-spend. The same again occurred during the early 1980s recession.</p>
<p>During the late 1980s, a massive commercial property (land) bubble formed, primarily in Melbourne and Sydney. It burst in 1989 due to the rapid escalation of interest rates to a nominal 18%. The resulting recession forced the Keating government to engage in a spending spree in an attempt to reduce the high unemployment during the early 1990s. Commonwealth debt peaked at 21% in 1996.</p>
<p>Once the Coalition gained power, again a combination of debt repayment and strong GDP growth saw the ratio fall to the lowest point on record, to 5% in 2007 (the Rudd government managed to lower it by a tiny fraction in 2008). Since the onset of the GFC, however, public debt expanded again under the Rudd and Gillard governments, to 16% in 2012.</p>
<p>A better measure of public debt is net rather than gross debt. The federal government doesn’t have liabilities alone; it also owns the debts of others. Subtracting this debt from the government’s shows net debt, which is always smaller than gross debt.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22191/original/qp36w3s8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>An even better indicator of the government’s debt position is its ability to service the debt - the net interest repayment burden - again expressed as a percentage of GDP. The gross or net debt to GDP ratio is not a perfect reflection of the government’s ability to finance its debt due to changes in interest rates at different times.</p>
<p>The following figure shows the net interest repayment burden peaked at 1.7% of GDP in 1987 and 1996, even though the gross and net debt to GDP ratios were higher in 1996 than 1987. The difference is due to higher interest rates during the 1980s.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22192/original/xzfzw9m8-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>What matters for countries with high levels of government debt is how high the net interest repayment burden is. This separates the US and Japan – countries with a relatively high level of government debt – from the basket-case PIIGS nations (Portugal, Italy, Ireland, Greece and Spain).</p>
<p>The federal government is currently in an excellent financial position. Even if the gross and net debt to GDP ratios were to rise, this does not necessarily translate into higher net interest repayments if the RBA further cuts interest rates from already historical lows and purchases government bonds. The federal government has one of the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/nationaldebt">lowest debt burdens</a> in the world.</p>
<p>Similar trends to the federal government public debt to GDP ratio is found in aggregate state and local government debt. From the 1850s through to 1890, colonial governments used debt to finance the construction of infrastructure. Tax revenue comprised a paltry amount of public finance (from 2% to 5% of GDP).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22193/original/yy7x327x-1365426171.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>The surge in the ratio from 1890 onwards was not so much due to state and local government spending to offset the effects of the depression, but rather due to falling GDP. For Australia, this depression was economically worse than that of the <a href="http://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf">Great Depression</a> of the 1930s. A similar spike occurred during the 1930s.</p>
<p>Unfortunately, data on aggregate state and local governments were not continued after 1982 in the sources used to compose the figures. Parliamentary Library <a href="http://www.aph.gov.au/binaries/library/pubs/bn/eco/grossandnetdebt.pdf">analysis provides</a> some data on current state and territory net debt, again showing the debt burden is certainly not onerous. Gross foreign public debt <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/MSB/65">sits comfortably</a> at 20.7% of GDP.</p>
<p>Currently, public debt at all levels of government is tiny by historical standards and is certainly sustainable. The fashionable idea often repeated these days that rising public debt poses a risk to the economy has little substance in reality. Compared to the pre-WWII era, governments of today are a picture of fiscal responsibility and prudence, with the rise in taxation revenue helping to offset the need for using debt.</p>
<p>The real debt problem Robb has ignored is the colossal levels of debt that now saturates every part of the private sector. Private debt as a proportion of GDP is overwhelmingly larger than public debt. Personal debt is 9%, mortgage debt at 84%, and non-financial business debt is at 50%, for a total of 143%. A McKinsey and Co report estimates the <a href="http://www.mckinsey.com/insights/global_capital_markets/uneven_progress_on_the_path_to_growth">non-banking financial sector</a> debt at 91%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22194/original/vt2h5g4d-1365426172.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Private debt is different to public debt. The historic record shows it is often used to speculate on assets prices, typically stocks and real estate, creating one bubble after another. Both the 1890s and 1930s depressions were caused by bursting commercial property bubbles, reflected in the sharp rise in the business debt to GDP ratios in the decade before both depressions.</p>
<p>A primary cause of the mid-1970s, early 1980s and early 1990s recessions were the bursting of smaller commercial and residential bubbles, financed by rising business and mortgage debt. The total private debt to GDP ratio reached a historical high of 158% in 2008, on an immense rise in household debt (mostly mortgage debt), driving the <a href="http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/">largest housing bubble</a> on record.</p>
<p>Australia’s history shows increases in the public debt to GDP ratio have two causes: World Wars (1914-18 and 1939-45) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008.</p>
<p>An interesting point to note is the Coalition’s criticism of the rise in public debt that occurred under the Labor governments during the early 1990s and today. If the positions were reversed, we are supposed to believe Coalition governments would sit on their hands during a recession and GFC while unemployment and underutilisation increases, risking votes and consequently their power. In this scenario, Labor would then be denouncing the Coalition for being bad economic managers.</p>
<p>Economist Stephen Koukoulas has noted almost <a href="http://www.marketeconomics.com.au/2024-labor-or-liberal-government-debt">$40 of the $96 billion</a> in debt inherited by the Coalition in 1996 was a leftover from the Fraser government in the early 1980s, when John Howard was treasurer. The recession during this period necessitated an expansion of government debt, though it was hypocritical for the Howard government to criticise Labor for its expansion of public debt when the Coalition acted no differently during an economic downturn.</p>
<p>That public debt has risen once again by a small margin since the onset of the GFC is not sufficient grounds to label it as excessive as Robb has. Thus, these criticisms over public debt have nothing to do with either political party being good or bad economic managers, but rather, is the result of cheap political point scoring, hoping the public doesn’t do its research. </p>
<p>Ultimately, the focus of concern should not be upon the government’s historically and internationally low position of public debt, but upon the immense burden imposed upon the Australian economy by private debt. Once the housing bubble begins to deflate and citizens reduce consumption to focus on debt repayment, the federal and state governments will have no choice but to go deeply into debt to ameliorate falling taxation revenue and higher unemployment.</p>
<p>There is no intrinsic problem with either public or private debt. Both need to be carefully considered to ensure efficient allocations into productive activity. Public debt is not a burden if it is used to produce an income stream to pay down the resulting interest or to enhance productivity, for instance, if invested in infrastructure, health, education, or research. It becomes a problem, however, if used to finance excessive defence spending, bank bailouts, pork-barrel projects and middle-class welfare.</p>
<p>The same goes for private debt. As long as debt finances production, the resulting income streams will be more than enough to pay down the debt. On the other hand, if private debt is used to speculate on stocks and real estate - as has occurred many times in the past - it simply results in a zero-sum game where speculators transfer assets among themselves without enhancing productivity.</p>
<p>Unfortunately, the discourse over debt is almost entirely focused upon public rather than private debt. There is no reason for concern over our relatively low federal or state debt. The real problem is in the major rise in the private debt, primarily within households. This is what commentators should be focusing upon.</p><img src="https://counter.theconversation.com/content/13245/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Philip Soos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Liberal MP Andrew Robb has criticised the rise in public debt under the current Gillard government in a recent ABC radio interview. During the interview, Robb claimed growth in public debt was excessive…Philip Soos, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.