Sections

Services

Information

UK United Kingdom

Why Abbott is right to abandon surplus promise

After beating up Kevin Rudd and Labor over debt and deficits for years, Tony Abbott has now dumped any return to surplus mantra, merely saying a Coalition government would beat Labor’s bottom line over…

Tony Abbott’s about-face on delivering a surplus in his first term is smart politics and good policy. AAP

After beating up Kevin Rudd and Labor over debt and deficits for years, Tony Abbott has now dumped any return to surplus mantra, merely saying a Coalition government would beat Labor’s bottom line over the next few years.

This about-face is smart politics and good policy. Rudd’s “cut to the bone” critique makes it hard to attack the Coalition for not balancing the budget.

Behind closed doors, Abbott and Rudd probably agree that with Australian unemployment rising and Xi Jinping and Ben Bernanke both taking their feet off the accelerator at the same time, now is not the time to bring a David Cameron-style austerity regime downunder.

Austerity didn’t work for Britain when China and the US were pumping up their economies. With both now in fiscal and monetary retreat, the notion of austerity-led recovery in Australia next year is fanciful.

Instead, Abbott is betting his company, carbon and mining tax cuts will revive the economy and generate more revenue, 1980s Reaganomics-style. Unlike most western countries, Australia can afford to follow the Reagan playbook.

Debt, lies and statistics

When it comes to debt and deficit, Australia isn’t Greece. It isn’t even Canada, Germany or Switzerland, three apparent western paragons of post-GFC virtue.

Understanding Australia’s public debt position requires more nuance than the sound bite-driven political point scoring that all too often masquerades as serious policy analysis. But the importance of getting the debt picture right justifies a deep dive into the statistics.

Kevin Rudd says our public debt is very low, showing just how well he navigated the GFC.

Joe Hockey says our debt is growing more quickly than almost anywhere, revealing Labor’s profligacy and mismanagement.

The problem is there is evidence to support both positions. As the old saying goes, there are lies, damn lies and then there are statistics.

But once you go through all the statistics, one thing seems clear: now is not the time to focus on bringing the budget back to surplus.

Meaningful international comparisons

The International Monetary Fund’s Fiscal Monitor is the government debt bible. Its statistic of choice is gross general public debt, the total amount of money all levels of government have borrowed and have eventually to pay back, expressed as a percentage of GDP so as to make comparisons among countries meaningful.

Australian gross public debt will be 27.6% of GDP by the end of this year. This is the second lowest among the 30 advanced economies monitored by the IMF, above only tiny Estonia. Fully two-thirds of the advanced countries the IMF monitors have gross public debt more than twice as large as Australia’s.

Germany is the best performer among the large G8 economies. Its 2013 gross public debt is slated at 80.4% of GDP, almost three times Australia’s. The comparable figures for the UK and the US are 93.6% and 108.1%. Japan’s gross public debt will be a stratospheric 245.4%.

So Rudd is right that Australia today is a very low public debt country.

But the Coalition says it was the Howard government that put Australia in this enviable position, a position that Labor has subsequently let deteriorate. They are spot on.

Australian gross public debt was 10% of GDP in 2006, the last full year of the Howard government. Again, Australia was only beaten by ever-abstemious Estonia.

“Debt blow-out”

The key question concerns how Australia has fared since 2006, and what this means for the future. When Hockey lambasts Labor for its debt blow-out, he is referring to proportionate growth in Australian gross public debt.

The IMF estimates Australian debt has grown by 176% since 2006. Put differently, Australian debt has almost trebled in the past seven years. And on this measure only two countries, Iceland and Ireland, have performed worse — and both were devastated by the GFC.

The US’s post-GFC stimulus is legendary, but its gross public debt has “only” grown by 64% since 2006 and this year, three times better than Australia’s performance. But this “better” is a product of the fact that the US started with much more public debt

Things look very different if we simply look at the increase in debt as a percentage of GDP. On this measure Australia’s debt situation has weakened from 10% in 2006 to 27.6% this year. Put differently, our debt has grown by 17.6% of GDP.

Here, Australia lies right in the middle of the IMF league table. We have done much better than the US, where public debt has increased by 42.0% of GDP, and the UK, where it has increased by 50.6% But we have done worse than Germany (+12.5% of GDP) and Canada (+16.7%).

Did Australia need an “average” level of fiscal stimulus after the GFC? Has this stimulus been productive or wasted? The Coalition is probably right that Labor did too much and some wasn’t very effective. Labor is probably right it was better to do too much than too little in the eye of the GFC storm.

Voters' choice

But it doesn’t seem voters are interested in our politicians refighting this old war. They are probably more interested in the future.

The IMF estimates that by 2018, based on Labor’s plans, Australian public debt will be back under 20% of GDP — still second behind Estonia, and compared with around 100% in both the US and UK. If we are to believe Tony Abbott, the Australian number will be smaller under a coalition government.

Australia is not in a fiscal crisis and its economy is slowing. Few would have thought that Tony Abbott would respond by going soft on deficits. But he is right to do so, and it seems voters will agree on 7 September.

Join the conversation

14 Comments sorted by

  1. John Crest

    logged in via email @live.com.au

    Sensible economic management: the hallmark of the Coalition government.

    report
    1. In reply to John Crest

      Comment removed by moderator.

    2. Michael Field

      logged in via email @gmail.com

      In reply to John Crest

      The Howard Government were poor economic managers, but benefited from two pieces of luck:
      1.The economic ignorance of Labor after Keating, meaning they didn't even know enough to recognise bad policy and hold it to account (also meaning they would have done an even worse job if they'd been in power.)
      2. The economic ignorance of the mass media, apart from a couple of writers on the Australian (yes, the Australian) and the AFR.
      3. An almost unprecedented surge in the terms of trade, which disguised their shameful bribing of the electorate. The fact that there was any deficit at such a time and that at the same time infrastructure throughout the country was under massive strain with no plans to do anything about it will go down in history as monumental incompetence.
      They instituted two importand structural reforms for which they deserve credit: the GST and the Future Fund, but this claim that the Howard government were good economic managers is just laziness or polemics.

      report
    3. Henry Verberne

      Former IT Professional

      In reply to John Crest

      Sensible economic management: NOT just the hallmark of the Coalition as this well argued article makes clear.

      report
  2. Henry Verberne

    Former IT Professional

    Where is Greg North: always banging on about Labor's HUGE debt. shows you the BS some people carry on with.

    The reality is that Labor could have lower debt but that in the end it does not matter all that much.

    It also highlights that Abbott and Hockey have been rather over-egging the argument that we are in budget emergency.

    Abbott's back down is another indication that he will do whatever it takes to win government.

    report
    1. Jack Arnold

      Director

      In reply to Henry Verberne

      Now Henry, you are being naughty and irresponsible expecting Greggie to reply to every article that does not agree with his one blind eye analysis. Why the poor man would be on his computer all day every day apologising for Liberal party non-policies and political commentators' churnalism.

      report
  3. Peter Evans

    Retired

    "Tony Abbott has now dumped any return to surplus mantra". Is that another way of saying that he lied when he promised that the Coalition would return the Budget to surplus in the first year and every year thereafter or later when he claimed that there would be a surplus by the end of the first term? I ask this question in the interest of fairness and consistency given the hounding of Julia Gillard (Julliar) over the introduction of the carbon tax and a number of subsequent issues. Were we to take that hounding as a new standard to be applied to all promises by politicians or only apply it to her? Does being able to come up with an excuse (We do not know the starting position of the Budget) also count?

    report
  4. Toby Paltridge

    logged in via Facebook

    It's about time some sense entered the election economic debate.

    Now is not the time to be striving for a budget surplus. Such an objective is purely arbitrary anyway.

    report
  5. Mike Swinbourne

    logged in via Facebook

    Abbott may be right to backtrack on the surplus commitment, but in doing so the man's hypocrisy is simply breathtaking in its arrogance.

    This is the man who, in January, said that he would deliver a surplus in his first year in government. Then in April it became in the first term. Now it is sometime in the next 10 years - but before Labor anyway.

    Just remind us all Tony - what did you day about Wayne Swan when he abandoned his commitment to a surpluse, and should we say the same about you?

    report
  6. Jack Arnold

    Director

    "Australia is not in a fiscal crisis and its economy is slowing".

    Thank you Geoffrey for finally getting the economic truth into a political article in TC. These links support your position.

    http://www.independentaustralia.net/2013/politics/tony-abbotts-budget-reply-porkie-pies/

    http://www.smh.com.au/federal-politics/political-opinion/abbott-not-gillard-is-the-true-class-warrior-20130428-2imis.html

    https://newmatilda.com/2013/08/26/abbott-will-get-taste-his-own-direct-action

    report
  7. Ted Stead

    Consultant

    A few points...

    "But the Coalition says it was the Howard government that put Australia in this enviable position, a position that Labor has subsequently let deteriorate. They are spot on." No, not spot on. It was the private sector going on a huge debt binge (along with a surge in the terms of trade) which put Australia in an 'enviable position'. A private sector moving to deficit, by definition, moves the government towards surplus. The government budget position is an outcome driven by…

    Read more
  8. John Phillip
    John Phillip is a Friend of The Conversation.

    Grumpy Old Man

    Great article, Geoffrey. Thanks for bringing some detail and facts to this topic minus any party political partisanship. Cheers.

    report