Public debt deficit

The Budget papers are huge and Delusional Economics has done a great job of summing up them up.

But for statistical wonks like myself it is the full papers that really excite . I’ll troll through the papers over the next day or so to draw out anything interesting.

For today, the below chart was on page 8 of the Budget overview. It’s the Budget deficit as a percentage of GDP

Whatever you think of the Budget and the issues around the structural deficit there is little doubt that Australia has one of the strongest public balance sheet positions in the developed world. If you think of the government as a company, which one would you invest in?

With world markets focussed on debt and deficits, this highlights why central banks and investors are diversifying into Australian Dollars.

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  1. Just imagine where we’d be if the calibre of our leaders were of a higher standard.

    • Higher calibre people generally can’t be bothered with the rubbish wages and 24/7 carping of people who reckon they can do a better job, but can’t be a$$ed trying.

      • You’re right.

        But also the way the system works is like it’s trying to jam a square peg into a round hole. This concept of having advisors and the heads of those departments acting predominately as mouth pieces is not, in my opinion, the most effective and credible way to run a portfolio. Inspiration should be seen top-down and not the other way.

        Let’s have a quick look at the man who holds the public purse:

        Name: Wayne Swan

        Education: BA (Qld)

        Past occupation:

        *Lecturer, Queensland Institute of Technology 1976-88
        *Policy analyst, Office of Youth Affairs 1978.
        *Adviser to the Leader of the Opposition, the Hon. WG Hayden, MP 1978-80
        *Special Ministers of State, the Hon. MJ Young, MP and the Hon. KC Beazley, MP 1983; and the Minister for Foreign Affairs, the Hon. WG Hayden, MP 1984.
        *Party official and adviser 1996-98.

        Qualifications in economics? Nope.
        Any real world experience in finance? Nope.

        The interest payment alone on our public debt is around $1.6 million per hour and very likely to accelerate.

        So, if money is what it takes to attract the right person with the necessary blend of skills, then so be it because mismanagement can be catastrophic!

        • Unfortunately, they don’t run advertisements for Ministers in the press as they arise.

          You have to be prepared to run the gauntlet of internal machinations and external criticism for many years to get to the heights of the front bench, let alone the Treasury portfolio.

          There seems to be a lot of criticism of Wayne Swan, and that may be because he is devoid of the experience you talk of. However Paul Keating left school early, didn’t bother with uni, and was a career politician, just like Wayne, and few people (whatever the colour of their politics)criticise his economic vision.

          Peter Costello, while he went to uni (Arts/Law) had next to no experience as an economist or financier. Yet many praise his work.

          We could always go to the US system where you appoint various Secretary’s (State, Treasury, Defense etc) from wherever you like, then craft bills for Congress. Although that doesn’t seem to work to well, and I’m not sure that is always the fault of the legislature.

          • Jules, I don’t dislike Wayne Swan. He’s a politician doing what he believes or what he’s told to do. Since he’s the current Treasurer he was used as an example.

            Unfortunately the system is the way it is and I doubt it will ever change. What I’m trying to highlight is for the system to change, make each position financially attractive in an attempt to broaden the pool of recruits, then recruit from within and appoint the appropriate people with the necessary skills for those portfolios.

            I agree with Prince on Costello and Keating. WRT Keating – I’m not a fan of him deregulating the dollar as we lost another control mechanism.

        • Good points Jules.

          The original concept of having individually appointed secretaries to a cabinet was in the era of small republican governments, where the legislature only sat infrequently and had a true check and balance against democracy in the upper chamber with appointed Senators.

          That is well and truly gone – USA is now a democracy, not a republic.

          Keating only had one major good economic reform – superannuation. Howard – GST. Costello – nothing.

          So yes, you can’t blame Swan that much. Would you prefer a bank economist as Treasurer? Craig James?

          I didn’t think so.

          • Sandgroper Sceptic

            Don’t forget Costello sold the bulk of Australia’s gold reserve at low prices losing over $5bn compared to the price today. Good work Treasurer!

            That said I think Costello is way better than Swan though so we are in a cleft stick.

          • Superannuation a “good economic reform” Prince?

            Compulsorily steal (currently) 9% of the entire population’s wages – ie, stealing away personal choice – and compulsorily handing it all over to know-nothing FIRE industry spivs and rent-seekers, to get fat on their billions in “fees” from mindless “investing” in bubble-icious stock markets, thus setting up millions for massive losses a la GFC?!?

            Compulsory superannuation was, is, and remains a grotesque and monumental social engineering scam. Designed to further foster the societal mindset of personal irresponsibility. And Big Government dependency.

            Especially when the government too, will (as in numerous other countries since the GFC) quietly confiscate our Super over time to bail out its own fiscal irresponsibility, and benovolently grant us a nice “pension” instead.

          • Oh, c’mon David,
            “..stealing away personal choice..” indeed. You mean the choice to piss it up against the wall, or buy another, bigger (imported) plasma TV.

            “Designed to further foster the societal mindset of personal irresponsibility. And Big Government dependency.”
            Oh, really? Funny – I thought that the idea of superannuation was to encourage (or force, if you prefer) people to take more personal responsibility for providing for themselves in retirement, and to lessen their dependence on Government to that end.
            I worked in Singapore during the early 90s, and all my local employees were required to put 15% of their wages into the CPF, matched by a 20% Government contribution. Shortly after I left there in ’93, the personal contribution was upped to 20%. So every working Singaporean was putting away 40% of their income into a retirement fund. I don’t see that this has had any adverse effect on the Singapore economy, and I’m pretty damned sure that the Singapore Government won’t have much of an unfunded pension liability in the years to come.
            I agree there could be some cause for concern about the competence of some fund managers, but don’t forget that we now have choice-of-fund legislation, and most of the larger funds offer various risk-level options. So it is not a given that ones Super money is necessarily invested in “bubble-icious stock markets.” The vexed question of fees is currently under review, as I understand, but again, it is not difficult for members to vote with their feet. Industry funds offer quite good returns, and their fees are minimal.
            One of the biggest problems surrounding superannuation (apart from the Government periodically changing the rules) is the simple fact that the average Joe takes absolutely no interest in where his money is, who’s looking after it, how much it is costing him, and what he’ll end up with. This is not the fault of the system, but surely reflects poorly on that “personal responsibility” of which you seem so fond.
            As for the Government nicking your super money – we have a great deterrent to prevent that from happening – it’s called the ballot box.

  2. Sandgroper Sceptic

    What is the standard get out clause from the financial advice industry? “Historical performance is no indicator of future performance?

    How long we will stand up as a paragon when the mining boom ends and our housing market crashes? We will have large structural deficits to infinity. The moment that meme percolates out to foreign investors there will be a nice rush for the exits and we will be in the same boat as US, Japan and parts of Europe. If the government ends up bailing out a couple of our (then) failing large banks we will emulate Ireland.

  3. Sandgroper Sceptic….spot on! The Government has a good balance sheet because so far the debt has been taken on by our private sector, but once they need bailing out, watch our balance sheet go the way of Ireland as we are told we NEED to bail out the banks.

    • And watch for changes in legislation on Superannuation, for the same reason.

      First, “compulsory” fixed % of Super funds in government-approved “investments” (eg, bonds). For “our own good” of course, probably following another stock market crash.

      Second, increases in that fixed %.

      Third, compulsory takeover of all Super by the government. And perhaps a “pension” commensurate with super balance at takeover, of we’re lucky.

      It’s happened in multiple countries abroad. Don’t for a minute kid yourself that it “can’t happen here”.

  4. I assume the graph includes forecasts? Because it looks like the Oz deficits are actually surpluses?

    “If you think of the government as a company, which one would you invest in?”

    Germany, if you put a gun to my head. There’s more to a company’s finances than a “pristine” balance sheet – its the robustness to shocks and unknowns. Australia has next to none built in, due to private debt and wholesale funding and the lack of savings and investment, and a weak currency. (i.e no internal strength – watch it fall 5-10% in a day if the RBA reduces rates….)

    Sure, Germany has MASSIVE exposure to foreign debts, but it can leave the Euro and be better off for it and it has a better economy overall.

    Still not a good choice. I’d prefer to “invest” in Singapore or Switzerland.

  5. But what exactly is this GDP? What exactly does it measure & what is it measured against? A depreciating currency?

    This public debt to GDP measure means nothing, GDP is all fluff.

    • I think a better measure is tax revenue to public debt because its impossible to appropriate/calculate total public and private GDP as “earnings”.

      In the US, tax revenue for FY11 is approx. $4.4 trillion, yet the public debt is $14.2 trillion for a 322% debt to revenue ratio.

      In Australia, tax revenue for FY11 is approx. $280 billion, yet the public debt is $140 billion for a 50% debt to revenue ratio.

      This will grow to $300 billion within the next 3 years, so the debt to revenue ratio goes up to roughly 100%.

      For the Australian federal government to be in a similar fiscal position to the current US would mean either a total debt level of $840 billion (i.e $700 billion more than now) or a combination of reduction in tax revenue by 20-30% to approx. $200 billion annually, and total debt of $600 billion – or double what is forecast.


      • The smaller share of government revenue is a result of Australia having a smaller government than the US. If you use revenue as yardstick, then a strong government is one that tax more of the GDP!!

        You need to put in the GDP numbers to get a better picture. Australia’s GDP is about $1.2 trillion. US’s GDP is about 14 Trillion. There is also government spending of When you put it into percentages, it works out as follow

        Australia : Government revenue = 280 billion, spending 320 billion, deficit is 40 billion. It’s 23%, 27% and 3% respectively.

        US : Government revenue = 4.4 trillion, spending = 5.8 trillion, deficit is 1.2 trillion. It’s 31%, 41% and 8.6% respectively.

        While I don’t think the current Australian government is doing a great job, the US is a much much bigger mess.

    • It’s all about the productivity. Any attempt to measure the improvement in a nation’s wealth must include productivity. It’s the national equivalent of incremental Return on Equity. Anyone can grow an economy by 1. adding more people 2. adding more debt 3. doing both (Australia any one?). However, unless we can continue to produce goods and services using less materials, energy and human labour then our standard of living doesn’t improve.

      • Well said Q – thats an interesting metric (ROIE) to apply to a country in terms of productivity.

        I just watched Howard talk at a breakfast meeting re: the Budget – he was all about “adding people” to equal growth…..

        GDP is a failed metric IMO – it needs to be replaced ASAP.

      • “adding more debt”

        That’s using the old noodle (Futurama, Series 2). I think you’ll find GDP is a measure of debt more than anything else, mostly bad & measured against the dollar what’s more, which IS in fact the obligation of the Reserve Bank & thus government, which means government debt to GDP is a measure of itself.

        Which means it makes no sense at all. Here’s a question for somebody – What was the government debt to GDP in 1997?

      • Cheers for the link. Looks like some interesting stuff there. It’s good to see someone else it looking at the total holdings of government debt.

        I wonder if Barnaby knows what was the government debt to GDP ratio in 1997?

  6. And as long as you think our foreign debt is just a free source of unlimited funds.

    I also agree with JMD. GDP is not a measure of anything. I remember a few years ago (well maybe a decade or so but at my age and stage of disillusionment what’s a decade or so! )some bloke calculated that if we excluded extra expenditure on security trying to keep thieves out of our homes and businesses that real GDP had not grown at all for many years. Security is a typical example. It adds to GDP but is actually a clear negative on our happiness, freedom, and way of life.

    John Mauldin has a rather good article on the subject this week.

  7. Sandgroper Sceptic

    +1 to replacing GDP it is a hopeless measure and locks us in into the wrong mentality. We have to get rid of the growth at all costs nonsense and focus on productivity and quality of life. For example how many people in Australia want a bigger Australia in terms of population? Or a large block of flats built next to them or more traffic or more pressure on hospitals etc.

    A measure that also takes into account the externalities of the environment would be nice as well. The current models seem to regard inputs (raw materials) as infinite and outputs as costless (waste/pollution). Given we live on a planet with finite resources this is just wrong.

  8. It would be interesting to see Irish 7 year forecast chart form, let’s say, 2005.

  9. hahaha no wonder were heading for the shit look at these posts LOL.
    the whole problem arises not from the free market, its the “policy” between central banks and beurarats.
    you cant “fix” anything, the more fixing the bigger disaster, untill money itself is free of “policy”. back in 2008, the market wanted to drop, so let it drop new business and banks would reopen, gov would contract and we’d have a depression for a while. Thats “capitalism”, setting interest rates, tweeking the economy is called something else, we’ll have to learn the hard hard way.

    • I dunno, Ponzi.
      There is much truth in what you say insofar as the market should be (and should have been) allowed to purge and reconstitute itself.
      But if faced with a choice between “policy” and “laissez-faire capitalism”, I think I would lean towards the lesser of two significant evils. Let’s face it, although the current batch of policy-makers are definitely not the answer to a maidens prayer, you couldn’t in all honesty say that unfettered capitalism has covered itself in glory of late, could you?

      • Deus Forex Machina

        On the money Julius…the answer has to be somewhere in between.

        Unrestained capitalism (greed) is what got the US in the position to blow its financial system up…a cleansing would have been nice, if only to wipe out the architects of the debacle…but the reality is that a depression would have probably hurt mainstream more.

        In many ways the middle way is the Australian way doesn’t mean that we can’t still get overinflated prices in markets or mis-allocation of resources but as the lesser of two evils i’ll take a capitalistic interventionist nation any day of the week.

        Creative destruction is great unless you are the one being destructed, there has to be a safety net somewhere even if its got a few holes.

        This has been a great conversation today.