You may recall the days of late 2009, and early 2010.
Barnaby Joyce had been appointed Opposition Finance spokesman. He was taking flak from all sides over his public warnings regarding Australia’s rapidly rising government debt trajectory. Ever the “little ‘ol country accountant”, Barnaby had quickly calculated the basic numbers:
Let’s talk about the abundance of faith exhibited by Labor when it tells us of the eight consecutive $19bn surpluses that are required to bring the budget back into orbit when the continued stresses on the international economy are clear and evident, especially in Europe.
Within the first two days of launching this blog in February 2010, I stated that “No, We Cannot Pay Our Debt”:
This country has never seen anything like eight consecutive years of $19 Billion surpluses. In fact, the Howard Government achieved it just 3 times… in 12 years… during an unprecedented mining boom.
A day later I posed the question, “Can We Even Pay The Interest?”
Click to enlarge
As you can see, Ken Henry’s projected Interest on debt alone is greater than many of the 12 years of Howard Government surpluses. And they came during an unprecedented mining boom…
Paying back the projected Interest-only will obviously be a big challenge. So try to imagine how we are ever going to pay back the principal too…
It is easy to see why Barnaby is so concerned about our ever-rising debt under Rudd Labor.
Because quite simply, we can not pay it back.
Since the days of February 2010, Barnaby has been demoted, and the trajectory of ALP’s borrow-and-spend-a-thon has streaked ever higher – see the masthead of this site.
Those Interest-on-debt projections have, of course, continued to extend further and further into the future:
Budget 2012-13, MYEFO, Appendix B, Note 10
Yesterday came the news that not only is there not going to be a return to budget surplus this year – quelle surprise! – but that an “expert” think-tank (ie, lobby group for vested interests) is now predicting a further decade of budget deficits:
Structural changes in the economy are likely to leave Governments across Australia facing budget deficits of around 4% of GDP for at least the next decade, according to research released today.
The Grattan Institute paper, Budget Pressures on Australian Governments, suggests it could be a long time before Australian governments post a collective surplus.
Fairfax papers reported (note the $40 billion error in the opening line; contrast the final paragraph):
Australia faces a decade of budget deficits with the annual total set to pass $60 billion in 2023 unless governments take tough action to “share the pain”, an expert panel has warned.
The Grattan Institute’s assessment comes as Treasurer Wayne Swan confirms the budget has taken a $7.5 billion hit since the midyear update in October…
The institute says that while notionally on track to surplus now, the combined state and federal budget deficits should reach 4 per cent of gross domestic product by 2023, which is about $60 billion in today’s dollars and would be about $100 billion in 10 years’ time.
I fear this estimate may well err to the conservative. A $100 billion combined budget deficit in 2023? No problem … Fed Labor achieved $55 billion in 2009-10:
Source: Catallaxy Files
One can only imagine just how big the TOTAL of Australian government debt – and the Interest bill – will be if the Grattan Institute’s prediction for another decade of annual budget deficits is realised.
Meanwhile, over the weekend the Australian Financial Review reported that the Liberal Party has backed away from its own commitments to achieving a budget surplus (h/t MacroBusiness):
Opposition Leader Tony Abbott has declared “all bets are off” on whether the Coalition will deliver a surplus in what could be its first year in office, prompting warnings from a prominent economist that the budget may not be balanced for years…
Asked at a public meeting in Melbourne when the Coalition would deliver its surplus, Mr Abbott said he had previously been confident about the timing based on government figures as they stood just before Christmas. He indicated he had changed position because the government wouldn’t reveal the budget’s true state.
And fair enough too.
Clearly though, none of the “expert” economists, commentators, and certainly none of our politicians – with the exception of Barnaby Joyce – will take any notice of this paragraph in the Grattan Institute’s report (emphasis added):
Balanced budgets over the economic cycle make a big difference. Persistent large government deficits incur interest costs. They lead to large government debt that can limit future borrowings. Some argue that high debt reduces economic growth. On any view, persistent large deficits can unfairly shift costs between generations, and reduce flexibility in a crisis.
As many developed countries have rediscovered in recent years, high government debt coupled with low economic growth creates a terrible economic dilemma. If government increases spending, the debt gets worse, markets charge higher interest rates, and borrowing more becomes impossible. If government tries to reduce its deficit, GDP slows further, and government debt can rise as a proportion of GDP, making the problems worse. Their successors and financial institutions can then find it difficult to borrow at reasonable costs, and economic growth is often slow for a long time.
How to respond to the trap of low growth and high government debt remains contentious. Far better to avoid the trap in the first place – which means running balanced budgets over the economic cycle.
Although the true state of the budget may be unclear, as the months and years pass by, there is one thing that becomes ever more clear.
Everyone should have heeded the warnings of our “little ol’ bush accountant”, the sacked Opposition Finance spokesman.
Barnaby was right:
“If you do not manage debt, debt manages you.”
– February 2010