Lurking behind every budget decision the government makes from now on — such as terminating JobKeeper or resetting JobSeeker — is the tip of a public debt iceberg. Like all icebergs, the largest part is out of sight until you hit it. In this case, our future economic stability will steam right into the hidden threat of ballooning public debt.
Although it is the pandemic that is driving debt to new heights, the explosion started with the global financial crisis more than 10 years earlier. Total public debt of Australia’s federal and state governments that stood at $150bn in 2007 had grown to more than $900bn by 2019 as Canberra was slow to close the deficit opened up by the GFC and as the states borrowed to ramp up infrastructure spending.
The same measure of debt now is projected by federal and state budgets to inflate to almost $1900bn in 2024 as a result of the pandemic and a further step-up in state infrastructure spending. At that level, it will be 86 per cent of gross domestic product, six times the 14 per cent in 2007.
Some economists say this is just a return to normal after an irrational anti-debt obsession whose time came and went. There may be something in that, but it also should be said in response that the Howard government and some state governments were wise to take advantage of economic winds that at the time temporarily favoured budget surpluses and debt reduction.
That posture left Australia well placed to absorb two big global shocks — the GFC and the pandemic. But that is not to say all the extra borrowings have been, or will be, spent wisely.
Since March last year, budget decisions have been made on the run, caution thrown to the wind and short-termism has become the order of the day as governments have adopted a “whatever it takes” attitude to managing the health and economic dimensions of the pandemic. While much of the extra spending was unavoidable, there are signs that economic support and stimulus measures have been overdone.
The argument over the quantity and quality of the fiscal response will continue, as it did for years after the GFC fiscal stimulus. Whatever the right judgment is about past actions, looking ahead fiscal policy will — or should — soon switch its focus to budget repair and longer-term risks from the debt build-up.
The Morrison government says this won’t happen until unemployment is “comfortably” (whatever that means) below 6 per cent. That is politically convenient, in that it takes the government past the next election, but it is not the most responsible economic policy.
The risks the debt iceberg brings are that it will become a drag on economic growth; interest rates, and therefore the cost of servicing the debt, will be much higher than assumed; productive tax and expenditure reforms are forgone because of their fiscal cost; and there is less budget headroom to respond to future crises.
There is too much complacency about the debt burden in the face of these risks. This is a “she’ll be right” attitude that recalls an even larger debt pile at the end of World War II leading to something much more modest in 20 years; not by being paid off but shrinking through economic growth, inflation and the repression of low or negative real interest rates.
It takes a huge leap of faith to count on this episode of economic history being repeated. Interest rates are assumed to remain at almost zero for another four years, then to edge up ever so gradually. The risks highlight the need for budget repair to be a priority for federal and state governments as soon as the pandemic passes, and certainly with a greater sense of urgency than seems the case. This does not require budget surpluses in the foreseeable future but it is realistic to expect budgets to move towards being balanced.
Governments need to make sure every dollar of pandemic-related spending really is temporary rather than being cemented into base spending. They also need to review the need for already-announced stimulus spending in the 2021-22 budgets, in the light of an economy in better shape than anyone dared to expect.
This fiscal policy needs to be combined with a broader economic reform agenda to strengthen the foundations for better productivity growth than we have seen for years. This is how to secure stronger and more durable economic growth, not through debt-funded stimulus which is, at best, of short-term benefit.
Balanced budgets and stronger, more durable economic growth is a surer path to managing down the public debt than the assumption that interest rates will remain at exceptionally low levels backed up by unsustainable Reserve Bank interventions.
Home > Commentary > Opinion > Plot steady course now to miss the debt iceberg later
Plot steady course now to miss the debt iceberg later
Although it is the pandemic that is driving debt to new heights, the explosion started with the global financial crisis more than 10 years earlier. Total public debt of Australia’s federal and state governments that stood at $150bn in 2007 had grown to more than $900bn by 2019 as Canberra was slow to close the deficit opened up by the GFC and as the states borrowed to ramp up infrastructure spending.
The same measure of debt now is projected by federal and state budgets to inflate to almost $1900bn in 2024 as a result of the pandemic and a further step-up in state infrastructure spending. At that level, it will be 86 per cent of gross domestic product, six times the 14 per cent in 2007.
Some economists say this is just a return to normal after an irrational anti-debt obsession whose time came and went. There may be something in that, but it also should be said in response that the Howard government and some state governments were wise to take advantage of economic winds that at the time temporarily favoured budget surpluses and debt reduction.
That posture left Australia well placed to absorb two big global shocks — the GFC and the pandemic. But that is not to say all the extra borrowings have been, or will be, spent wisely.
Since March last year, budget decisions have been made on the run, caution thrown to the wind and short-termism has become the order of the day as governments have adopted a “whatever it takes” attitude to managing the health and economic dimensions of the pandemic. While much of the extra spending was unavoidable, there are signs that economic support and stimulus measures have been overdone.
The argument over the quantity and quality of the fiscal response will continue, as it did for years after the GFC fiscal stimulus. Whatever the right judgment is about past actions, looking ahead fiscal policy will — or should — soon switch its focus to budget repair and longer-term risks from the debt build-up.
The Morrison government says this won’t happen until unemployment is “comfortably” (whatever that means) below 6 per cent. That is politically convenient, in that it takes the government past the next election, but it is not the most responsible economic policy.
The risks the debt iceberg brings are that it will become a drag on economic growth; interest rates, and therefore the cost of servicing the debt, will be much higher than assumed; productive tax and expenditure reforms are forgone because of their fiscal cost; and there is less budget headroom to respond to future crises.
There is too much complacency about the debt burden in the face of these risks. This is a “she’ll be right” attitude that recalls an even larger debt pile at the end of World War II leading to something much more modest in 20 years; not by being paid off but shrinking through economic growth, inflation and the repression of low or negative real interest rates.
It takes a huge leap of faith to count on this episode of economic history being repeated. Interest rates are assumed to remain at almost zero for another four years, then to edge up ever so gradually. The risks highlight the need for budget repair to be a priority for federal and state governments as soon as the pandemic passes, and certainly with a greater sense of urgency than seems the case. This does not require budget surpluses in the foreseeable future but it is realistic to expect budgets to move towards being balanced.
Governments need to make sure every dollar of pandemic-related spending really is temporary rather than being cemented into base spending. They also need to review the need for already-announced stimulus spending in the 2021-22 budgets, in the light of an economy in better shape than anyone dared to expect.
This fiscal policy needs to be combined with a broader economic reform agenda to strengthen the foundations for better productivity growth than we have seen for years. This is how to secure stronger and more durable economic growth, not through debt-funded stimulus which is, at best, of short-term benefit.
Balanced budgets and stronger, more durable economic growth is a surer path to managing down the public debt than the assumption that interest rates will remain at exceptionally low levels backed up by unsustainable Reserve Bank interventions.
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