From the Australian Office of Financial Management (AOFM) Public Register:
There are many who want you to believe that Australia’s public debt level is “low”, and nothing to be concerned about.
The truth is, there are a lot of lies told about our public debt. Usually, they are lies of omission. A deliberate choice to not give you the truth, the whole truth, and nothing but the truth.
Recently the Australian Financial Review published an article that — unlike politicians’ claims — would hold up in court:
You’ve been grossly misled about Australia’s finances – again.
Getting insight into the true state of the government’s finances is as important as understanding your own. The government’s liabilities are ultimately our debts, and will be paid back by taxing our earnings.
Last time I sunk my teeth into these issues I explained how the ostensibly very low “net debt” figures bandied around by many, including the PBO [Parliamentary Budget Office] are a complete fiction: they assume the debts of wholly owned government companies and state governments simply do not exist.
The net debt numbers are also artificially reduced by taking cash from the Future Fund, which was set up to meet unfunded superannuation liabilities, which are not – surprise, surprise – included in the debt estimates.
It’s the same as ignoring money you owe to someone but recognising the cash you have saved to repay them.
Once you add back in state and wholly owned government entity liabilities, Australia’s net debt almost doubles from 10.6 per cent to over 20 per cent of gross domestic product. Since net debt is open to so much fudging, real analysts focus on true debt. Since 2007 federal and state government debt has exploded from $150 billion to $500 billion, with the actual debt-to-GDP ratio approaching… 40 per cent…
This is precisely what Barnaby Joyce has been saying, since late 2009.
In recent days here at Barnaby Is Right, we have seen how our Treasury department boffins have completely failed to recognise the true reason for Australia’s structural budget deficit.
It is exactly the same reason that Ireland crashed in 2008.
A banking system — and a government — that had become dependent on profits (and taxes) flowing from “an unsustainable boom in the housing sector”:
So our supposedly “low” and ever-rising public debt level does matter.
Because at 40% of GDP (Federal and state debt combined), our true public debt level is now 61% worse than Ireland before it crashed … and bailed out its banks:
You may notice that the chart for Australia shows an apparent small decline in (Federal) government debt in 2013, to 20.7% of GDP (circled in red).
That is the Federal government’s forecast.
We all know what their forecasts are worth.
Labor spending simplified –
“He’s pretending that he’s elected by the people, and he’s actually elected by the banks”
In the following interview, Professor Steve Keen discusses how government “stimulus” or “help” programs that hand out borrowed (by the government) money to entice prospective house buyers, are actually Ponzi schemes.
But the most important truth of all is revealed from 10:14sec onwards:
INTERVIEWER: The Chancellor of the Exchequer, George Osborne, says he wants to reduce debt in Britain, while simultaneously launching the “Help To Buy” scheme which is an increase in debt. So my simple question is, Is the Chancellor lying?
KEEN: I think the Chancellor, like most politicians, is focussing on the level of government debt, not on the level of household and private debt, and they think that’s the real problem. The cause of this crisis was an out of control private banking sector lending to the private sector to encourage it to speculate on assets….
INTERVIEWER: (interrupts) Let me, let me, let me jump in for a second, because what we have found out in 2008 and going forward is that there really is no such thing as private debt, because when these private debts become unsustainable the private sector simply gives them to the government. So ultimately taxpayers always end up footing the bill for this debt, all the combined debt of household debt, bank debt, government debt, it’s all the same debt, that’s all underwritten by the same abused taxpayers, and the Chancellor — by ignoring this — is pretending that the UK people are brain dead!
KEEN: Well, what he’s pretending is that he is elected by the English people and he’s actually elected by the English banks. All this happens because the banks have got the politicians by the intellectual balls. They believe that the economy has to have a growing banking sector to be healthy, and that’s just like believing that you have to have a growing cancer to be a healthy human being. Past a certain stage the financial sector becomes a parasite. But it becomes such a strong and powerful parasite that the politicians think that if they let it die the economy will die. That’s precisely the opposite of the case — you’ve got to get the financial sector to shrink, you’ve got to cut it down, say in England, by a factor of at least 2 — and then in terms of abolishing debt, writing it off, not honouring the stuff, and standing up for the debtors, rather than standing up and voting for the creditors which, unfortunately, is what the politicians around the world have been doing this time around…
Unfortunately, Steve sidestepped the critical observation made by the interviewer — that because banksters simply palm off their out-of-control debt problems to the government, aided and abetted by compliant politicians, what this means is that, in the end, private debt and public debt must be considered in sum, not separately.
This is why Barnaby is right.
Although relatively “low” compared to that of “other advanced economies”, nevertheless Australia’s ever-rising public debt trajectory does matter a helluva lot.
Because — even though (sadly) Barnaby never points this out — Australia’s private debt levels are the highest in the world.
Our Household Debt sits around 150% of household disposable income.
Our government-guaranteed banking sector is massively leveraged to Australia’s world-leading house price Ponzi.
So, simply stated, because of our massive private debt problem, our nation absolutely cannot afford the added risk of an ever-rising public debt level too.
Let’s hear a caustic cheer for all the “experts” who insist that Australia’s public debt is “small”, and does not matter.
Interest on debt forecast, Budget 2012-13:
Interest on debt forecast, Budget 2013-14:
That’s a blowout of $699 million in 2012-13. $937 million in 2013-14. $1.594 billion in 2014-15. And $1.982 billion in 2015-16.
For a grand total blowout — just the blowout, not the total — of $5.2 billion “over the forward estimates.”
Now remember — all this is based on the forecast assumption of 5% per annum nominal GDP growth in the next two years. Even if that were to happen, the forecast is for another deficit (ie, more borrowing, at interest) of $18 billion in 2013-14, and $10.9 billion in 2014-15.
So, what do you think is going to happen to the forecast budget deficits — and the forecast interest on debt —
if when that GDP forecast turns out to be highly optimistic … again?
Dear reader, I invite you to ponder, if you will, just how much productive investment could be made, if the economy were not loaded down with the ever-increasing burden of repaying a forecast $14 billion every year to (mostly foreign) bondholders, just for Interest on the Federal government’s debt?
Senator Joyce writes for the Canberra Times (my emphasis added):
No saving graces as Labor alliance targets our savings
I always believed a net debt figure that assumed using public servants’ superannuation savings to pay off public debt was an absurdity. Well, now the Labor-Green-independent alliance is proposing that super be used to pay off debt.
When you tax more of something you end up with less of it. Why then does the Labor government want to raise taxes on superannuation? Do we really need a lower savings rate, and therefore more consumption in Australia?
Australia has some of the highest total debt levels in the world. In net terms, from the public and private sectors, we owe more than $700 billion to overseas countries. In terms of our GDP this is the eighth highest level of debt in the world, behind countries such as Portugal, Ireland, Greece and Spain.
Our debt is partly a consequence of a mining boom, where billions has been invested in our mining industry. Private companies need to take on debt to build these assets and we can’t fund all of these investments from domestic savings. But that is no reason to unnecessarily reduce domestic savings even further, and increase our reliance on foreign debt even more. We should be doing the opposite. We should be making it easier and more attractive for Australians to save. Our tax system barely does that now, however.
Let’s say you get a $1000 bonus from your boss. You have two basic choices: you can spend the money, or you can save the money. If you spend the money you will pay about 30 per cent in income tax and a 10 per cent GST. This leaves you with around $600 to spend on say a flat-screen TV. You pay no more taxes after that.
If you save the money by, say, putting it into bank account, you will pay the income tax up front, and then get taxed every year on the interest you get paid in that bank account, including on the part of the interest that just compensates you for inflation.
On that basis, the “double taxation” of savings is a raw deal. That’s one of the reasons why we offer a lower tax rate on superannuation: to encourage people to save not spend; to encourage individuals to make provision for their own retirement, rather than all of us having to fund pensions for everyone.
With an ageing population, that problem is only going to become worse and we should be looking to encourage more Australians to save rather than raise yet more taxes on superannuation. That’s exactly what the Coalition has proposed. We have proposed a 10 cents in the dollar tax concession for those that put money into super funds that invest in nation-building infrastructure. It’s a two- birds-with-one-stone approach. We encourage more people to save and have more funds available to invest in the roads, rail and water infrastructure a growing nation desperately needs.
The reality is Labor know all this. They know that we should encourage savings not spending. There is only one reason that they are looking to raise taxes on our savings. They have run out of money and need more of your savings to pay for their debts.
Any government looking to raise taxes on you should be required to get their own spending in order first. Our government is not spending our money wisely enough to be deserving of us giving it more. The Green-Labor-independent alliance spent years promising that our debt is not a problem. If our debt is not a problem, why do they need to raise taxes on our savings?
Cleaning up after this fiasco will be an infuriating task. They create a fiasco selling mining licences without the appropriate oversight and in inappropriate area. Somehow the Coalition is left explaining what we will do to rectify their problem.
They shut down trade with major trading partners in Indonesia and decimated the northern cattle industry and we are asked how we will fix it up.
One of the key reasons that I believe that I have a duty to stand against a key player in this Green-Labor-independent alliance, in Tony Windsor, is that you cannot possibly fix anything from Opposition. That means my job is to help win seats off the government wherever they are standing. Tony Windsor is a key member of that government and it is his job to defend the record of waste, mismanagement and higher taxes of the government he chose.
Senator Joyce continues to make good on his pledge to keep warning about rising government debt (excerpt from the Canberra Times, link to come):
As a nation we are only $35 billion away until we max out the nation’s credit card again. Wayne Swan promised that we would not get close to our $300 billion debt limit. Indeed, he said that at the end of each year we would be below $250 billion. We now know he won’t keep that promise, just like he has not kept many others.
Prior to the $300 billion limit, we had a $250 billion limit that we were never going to exceed. Before that, our debt was not going to go beyond the “temporary limit” for the “GFC” of $200 billion. That level was an increase from the initial limit of $75 billion set by the Treasurer of The Millennia, Wayne Swan.
All promises are not worth the paper, or digital transmission device they are written on if you cannot pay for them.
So now that we are no longer going to have a surplus, even though Swan tried every clumsy accounting trick to fudge one, is our next little necessity a further extension of our nation’s credit card limit?
If this is not infuriating enough it always comes adorned with the embracing platitudes, whispering to each that “the GFC made us do it” and “this is not as bad as it looks”. Make no mistake though the kid is going to be sent to the taxpayer to bring up.
We are racking up debt without building anything, just supporting well meaning but in reality totally naïve frolics. Heaven help us if circumstance forces a nation threatening expense on us. In the meantime necessary infrastructure is designed, promised, but not built, filing cabinets full of great ideas all just waiting for a little money miracle.
No doubt, come May there will be a new budget with new promises of a surplus very similar to the previous ones they never kept.
The Nindigully Pub, located between St George and Mungindi, has a permanent sign out the front saying “Free Beer Tomorrow”. Swan could use them in his economic team.
Modelling released by the firm Macroeconomics last week projected another $50 billion in deficits over the next five years. But this hides the high price that others are paying for our exports. If we instead correct to more normal economic conditions, our deficits over the next five years could amount to more than $100 billion.
What if we correct to sub-normal economic conditions?!?
So instead of being in Canberra to fix this budget bungle of their making, the Prime Minister has decided to camp out in Rooty Hill for a week to explain how she really can be trusted now…
A word to the many well-intentioned folk who habitually rush to criticise the good Senator, by pointing out that Australia’s PRIVATE debt level is the real problem.
Yes indeed, that is true. Very true.
However, your humble blogger would respond by pointing to the dire state of nations abroad – such as Ireland – who were once, not so long ago, very much like us.
“Low” public debt. Huge private debt.
What happened when the bankers’ private debt Ponzi collapsed?
A huge chunk of the private debt problem – the bankers problems – was transferred over to the public balance sheet.
Too Big To Fail.
The bankers privatised the profits. Then socialised their losses.
My point is this.
The more our public debt rises unnecessarily – and wasteful, inefficient, non-productive, debt-financed government spending is precisely what Barnaby highlights – the greater the danger overall.
If (when) the government socialises the (inevitable and looming) losses of the collapse of our own private sector debt Ponzi, the public balance sheet will only be the less capable of doing so if more and more public debt has been racked up beforehand.
Wastefully. Non-productively. And unnecessarily.
That is the point.
If, in pressing your quite valid concerns over private debt, you are happy for the government to rack up more and more inefficient, wasteful, non-productive, unnecessary public debt, then you are simply inviting far more trouble overall, than the level of private debt alone implies.
Let us return to a topic covered previously ( Who Owns 73% Of Our Debt? ; Our Government *Officially* Does Not Know Who Owns More Than 60% Of Australia’s Debt ).
According to the RBA’s most recent statistics, 84% of the “public” debts being accrued by Green-Labor are owed to “Non-residents”.
$187.6 billion, out of a total $223.3 billion, at end December 2011.
A new all-time record level of indebtedness to foreigners:
Australia, you are being sold out.
As Mark McGovern of QUT’s Business School observed in the must-read Australia’s Debt Dreamtime:
The net external wealth of Australia has deteriorated across the generation (McGovern 2010b, from which Figure 1 is drawn). Calculation of external wealth is based upon cumulative financial surpluses from an essentially zero basis in 1960. As is evident, Australia has been increasingly building external liabilities. A particularly marked decline has occurred over the last decade resulting in a total external exposure of $820b as at June 2010 with an annual deterioration of over $50b.
The central conclusion is stark: all the efforts of a generation of Australian men and women have only made them more obligated to the rest of the world. All that reform, all those industry and government initiatives, all those strategies, all that talk of productivity, all the promises of a previous boom in mining – all have come to naught. Today, we stride the world stage with external debts and other net liabilities above seventy percent of GDP, and increasing. Unaddressed, this is a precursor for crisis…
And as Delusional Economics recently observed (emphasis added):
So where is it all going ? Well if we breakdown primary income into its component parts we get the result below. This tells us that the major components of our primary income deficit are from direct investment income and portfolio interest payments to the rest of the world:
Which basically means that in aggregate Australia sends massive amounts of dividends and interest payments to the rest of the world. In fact it is so large that it is dwarves our trade in goods and services, resulting in a net loss to the external sector even during the historically high terms of trade. The most important thing to note is that these are payments stemming from previous foreign investments meaning Australia is continuously making payments to rest of the world somewhat independently of the balance of trade.
Finally, the financial account tells us that in order to maintain this current account deficit, Australia continually relies on foreign direct investment capital flows along with sales of equities:
So in other words we sold lots of new financial assets to foreigners so we could pay them the interest we owed them stemming from their previous purchases. Sounds a little ponzi-ish doesn’t it?
And as reader Craig so eloquently and insightfully observed in comments to Saturday’s post about the Foreign Investment Review Board being – in the words of Barnaby Joyce – “full of merchant bankers“:
In Australia, everything is up for sale to foreigners and always has been. The FIRB is absolutely useless; a bunch of doctrinaire econocrats spouting the Treasury Line. These are people, just like the rest of the governing class actually, who have no sense at all of the national interest. Patriotism is a dirty word for them. I’m not surprised the Liberals couldn’t give a toss about selling off the farm. When Lenin once observed that if the Bolsheviks starting hanging some of the bourgoisie, the others would compete among themselves to sell them the rope, he had people like the members of the Liberal Party in mind.
What a dreadful choice we Australians are left with; between a bunch of socialist incompetents on the one hand and money-grubbing traitors on the other.
You know what they used to do to traitors?