… when John Howard handed government over to the Labor Party and then the Labor, Green, independent alliance, Australia was owed tens of billions of dollars by the world. When they handed government back to us, all your listeners owed the world hundreds of billions of dollars. – Deputy Prime Minister Barnaby Joyce, speaking on the ABC’s AM program, Tuesday April 19, 2016.
Expect to hear a lot about debt and deficit in the lead up to the federal election, with both major parties aiming to present themselves as the better economic managers.
Deputy Prime Minister Barnaby Joyce said that when the Coalition lost power in 2007, Australia was owed billions by the world – but that when the Coalition regained government at the 2013 federal election, Australia was in debt.
Is that right?
Checking the source
When asked for evidence to support the deputy prime minister’s assertion, a spokeswoman for Barnaby Joyce cited a 2014 report from the Parliamentary Library titled Australia’s foreign debt: a quick guide. This report used data from the Australian Bureau of Statistics.
The spokesperson said:
Debt owed by the public sector is ultimately owed by all Australians, who must pay tax to eventually pay for this debt.
The Parliamentary Library’s report shows that the Australian public sector became a net lender to the rest of the world, holding -$15.6 billion in foreign debt at the end of 2006-07, but owing a net $226.2 billion to the world by the end of 2013-14.
The Library attributes the fall in the Australian public sector’s net foreign debt from 1996 and the shift to become a net lender to the world by 2006-07 to “declining federal budget deficits and the emergence of budget surpluses over this period”.
Joyce’s spokesperson is talking here about public sector net foreign debt – that is, debt owed by all levels of government, public companies such as NBN Co, and the Reserve Bank of Australia.
It is true that Table 2 of that Parliamentary Library report shows the figures the spokesperson referred to.
However, going back to the original ABS source and using the latest available release of the Balance of Payments and International Investment Position data gives us a more refined picture of net foreign debt dynamics than is presented in that 2014 Parliamentary Library report.
Deconstructing the evidence
The graph below plots the ABS data on net foreign debt separately for the public and private sectors.
As the graph shows, the period during which public sector net foreign debt was negative is limited to two quarters (Q1 and Q2) in 2007. Apart from these two quarters, the public sector has always been a debtor to the rest of the world since 1988 (which is as far back as the data goes in the latest ABS release).
The line shows public sector debt has been increasing since 2007 (when the Global Financial Crisis began), and that has continued after Labor lost power in 2013. The budget deficit generated after the GFC has contributed, to some extent, to the increase in net foreign debt.
Let’s zero in on what happened to public sector net foreign debt during the period to which Joyce’s quote referred.
The graph shows that during Q2 of 2007 that Australia’s public sector net foreign debt was in credit by $15.6 billion.
By Q4 of 2007, which is when the handover of power from Howard to Rudd occurred (on December 3, in fact), Australia’s public sector net foreign debt was actually in debit again – by about $41.6 billion.
So Joyce’s statement that “when John Howard handed government over to the Labor Party and then the Labor, Green, independent alliance, Australia was owed tens of billions of dollars by the world” is not entirely accurate. At the moment that handover occurred, the Australian public sector owed the world $41.6 billion.
The point at which “Australia was owed tens of billions of dollars by the world” during that election year was Q2 – under John Howard, yes, but two quarters before the handover of power occurred.
It is true that when the Coalition regained government from Labor in 2013, the Australian public sector owed the world hundreds of billions of dollars. Tony Abbott took up the prime ministership in September 2013, when Australian public sector net foreign debt was more than $200 billion.
Drilling down to government debt
So far we have looked at public sector net foreign debt, because that’s the data set Joyce’s spokesperson directed us to.
Remember, though: public sector debt is not just government debt. It also includes debt held by public companies (for example, a public company that has issued bonds to raise funds), as well as debt held by the Reserve Bank of Australia.
If we tease out just the government debt, ABS data also show that in Q1 and Q2 of 2007, the general government held net foreign debt for $22.9 billion and $25.5 billion respectively.
That is, even in the short period of time when the public sector as a whole was owed money by the rest of the world, the general government still owed the world money at that point.
The only reason the public sector as a whole was in credit in Q1 and Q2 of 2007 was because of public financial corporations and the RBA, which jointly were owed more than $70 billion by the rest of the world at that time (as you can see in column AL of the ABS data).
Barnaby Joyce’s statement that “when John Howard handed government over to the Labor Party and then the Labor, Green, independent alliance, Australia was owed tens of billions of dollars by the world” is not entirely accurate.
Strictly speaking, by the time Kevin Rudd took power in December 2007, Australia owed the world “tens of billions of dollars” in net foreign public debt, as detailed above.
But it is true that throughout the election year of 2007 Australia’s net foreign public debt was very low, and by 2013 it had climbed to “hundreds of billions of dollars”, as Joyce said. – Fabrizio Carmignani
I think this is a sound analysis. To restate the point above, there is a distinction between gross and net public debt, and between public debt and overseas public debt. Gross debt is the total outstanding debt of government sector. Net debt subtracts off some of the financial assets of the government (though different sources may include different assets in this definition).
Some countries like Greece have gotten into trouble with very high levels of foreign-owed government debt. The Greek government owed money to EU banks, and the EU (mostly France and Germany) could not let Greece default as it would bring down those banks. This debt has now moved from the banks to the EU and elsewhere. The point illustrated by Greece and many other countries through history is that foreign-owed public debt can create significant problems for the government.
However, Australia’s public debt is nowhere near the levels of Greece or other problematic OECD economies. Australia does have challenges that need to be addressed regarding the level and trajectory of public debt in total, but these are manageable compared to many other countries. Australia’s foreign-owed public debt is something I’ve looked at. But is not something I’ve ever lost a minute’s sleep over.
In short, the points raised above are correct but to me, the more important issue is rising public debt, not who is funding that debt. – Mark Crosby