Yesterday, Fairfax’s Kenneth Davidson claimed that the Coalition had fabricated a Budget emergency and argued to increase public debt in order undertake worthwhile investment projects that provide a net benefit to the community:
The 2014 federal budget is built on the big lie that the Australian economy is facing a debt crisis…
The truth is, the Commonwealth doesn’t have a debt problem. Estimated net debt in 2013-14 is $197.8 billion, or 12 per cent of gross domestic product – one of the lowest of the mature industrial countries. If Australia was a corporation, the directors (cabinet ministers) would be likely to be accused of running a ‘‘lazy balance sheet’’ and booted out by shareholders (voters).
There is no reason a government shouldn’t increase its debt if it has unemployed labour resources, growing unemployment, an absence of inflation and inflationary expectations, record low interest rates and – given wise governance – opportunities for investment where the social and economic return on the investment is higher than the cost of capital.
While I agree with Davidson that increasing public debt is not necessarily “bad” if it is used to boost the productive capacity of the economy and raise living standards – making the extra debt ‘self-liquidating’ – I do feel that he has underplayed the very real medium to longer-term pressures facing the Budget as the once-in-a-century mining boom unwinds and the population ages.
While Davidson can rightly claim that there is no current emergency, the above headwinds mean that the Budget will remain permanently in structural deficit unless action is taken on both the revenue and expenditure sides. The debate, therefore, should not be about whether to have budgetary reform, but rather about ensuring that reform is undertaken in an efficient and equitable manner, for example by closing Australia’s egregious tax lurks (e.g. superannuation concessions, negative gearing and capital gains tax concessions), as well as shifting the tax base away from productive enterprise (e.g. labour) towards taxes on land, minerals and consumption.
Indeed, the Parliamentary Budget Office (PBO) has also questioned Davidson’s view that there is no Budget emergency, arguing instead that the crisis is “real” and if “left unchecked, gross debt would balloon to $667 billion”. From The AFR:
“If you just continued on the trajectory of payments and revenues prior to the budget, net debt is forecast to grow rapidly, I think, at the highest rate in the OECD,” [PBO head, Phil] Bowen said.
“I don’t think that’s a fiction at all, but neither am I saying that we have an immediate emergency”…
“Sure we’re currently at a very low level relative to the rest of the developed world, but frankly we don’t want to find ourselves where the rest of the world is,” he said.
“You’ve got to have a buffer. One of the reasons we came through the global financial crisis so well was because we started with assets.”
Davidson and other commentators also need to recognise that the credit rating agencies (CRAs) have demanded that the government provide a credible path back to surplus, or risk Australia’s AAA rating. While it would be easy to sweep aside the CRAs concerns as being irrelevant, the fact is Australia’s banking system is tied to the sovereign rating, so if Australia is downgraded, then so to are the banks. This raises a whole bunch of issues for bank funding and access to international capital markets, which are fundamental to keeping one half of Australia’s ‘houses and holes’ economy alive. Like it or not, the AAA rating is integral to Australia’s current economic structure, especially as the nation is about to go off the mining investment cliff.