Mr Hockey's plans for $1.6 trillion of government debt

Sun, 29 Mar 2015  |  

The Abbott government has no intention of ever repaying government debt. None. It has, quite quietly, announced that it plans to keep borrowing so that government debt remains at 13 per cent of GDP right out to at least 2054-55 which means government debt will be $1.6 trillion. Yes $1.6 trillion of government debt.

The decision to keep government debt at this level was buried in the recent Intergenerational Report. The IGR announced that the Abbott government intends to keep borrowing for at least the next 40 years and therefore maintain government debt "at a level equivalent to 13 per cent of GDP... where it will remain over the projection period [to 2054-55]" (See page 83 of the IGR).

Based on the assumption that Australia's GDP will be around $12.5 trillion in 2054-55, at 13 per cent of GDP, the Abbott government is aiming to have government debt at over $1.6 trillion by 2054-55. It currently is around $365 billion. (This is the level of GDP is implied in the IGR based on the assumption of nominal GDP growth of 5.25 per cent per annum.)

Whatever happened to the promise to cut or eliminate government debt?

Mr Abbott and Mr Hockey reckoned the previous Labor government left a "debt time bomb" with its assertion that government debt was on track to "rise to $667 billion". The $1.6 trillion it is now specifically aiming for swamps that. Mr Abbott described debt "skyrocketing towards $667 billion" and the government was "paying out too much dead money on interest alone".

On an interest rate assumption of 5 per cent, the government will be paying $80 billion a year of "dead money" on interest in 2054-55. That will be over $6.5 billion a month, up from around $1 billion a month at the moment.

Treasurer Hockey has said that the trajectory of government debt under Labor was "like someone with a credit card who is out of control". Mr Hockey even claimed, just two years ago, that "We are ready to pay back the debt".

Well that plan to pay off debt is no longer in the mix, it seems.

Coalition members commonly suggest that Australia's fiscal position risks becoming like Greece or other such melodrama. PM Abbott made that claim just last week.

Of course, all of these references are to gross government debt, including those from Mr Abbott and Mr Hockey.

The reason for keeping government debt is something I have written about ad nauseam for years (one example here: http://thekouk.com/blog/why-government-debt-must-grow-forever.html#.VRdBPYv5moM) – government debt is an essential element of financial markets, it provides a so-called risk free yield curve as a benchmark for pricing State government and private sector debt. Government debt is needed to underpin the futures market and to provide a source of capital for the banks as they move towards meeting their Basel III obligations. It is an essential element of any good fiscal management.

The issue here is the hypocrisy of Mr Abbott and Mr Hockey with their deceitful use of government debt to make political points. It will be interesting indeed to see how they deal with questions relating to their new-found appetite for government debt and their plan to increase government debt to $1.6 trillion in 2054-55.

comments powered by Disqus

THE LATEST FROM THE KOUK

My 2016 forecasts: A stocktake on how they are going

Sun, 24 Jul 2016

A little over six months into the year, I am doing what almost no other economist does and present a scorecard on my forecasts for 2016. The record is mixed – some big wins, some big errors.

On 1 January 2016, I had my Top 11 tips for the year for economics, politics and markets. Those forecasts are reproduced below, with my assessment of how those forecasts are travelling in bold.

1. Real GDP growth in Australia will accelerate to around 3.25 per cent, driven by strong exports, solid growth in household spending, a further lift in dwelling construction and a meaty contribution from public sector demand. Business investment will remain horribly weak, but even that might find a base during the course of the year. There seems precious little chance that GDP growth will slip below 2 per cent at any stage in 2016. [This forecast is looking quite good although there are some headwinds for GDP in the second half of the year. A reasonably good forecast.]

Infrastructure spending should be based on need, not cheap money

Sun, 24 Jul 2016

This article first appeared on The Guardian web site at this address: https://www.theguardian.com/australia-news/2016/jul/22/infrastructure-spending-should-be-based-on-need-not-cheap-money?CMP=share_btn_tw 

--------------------------------------------------------

Infrastructure spending should be based on need, not cheap money

As Australian government bond yields fall to record lows, debate is hotting up over whether the government should take advantage of these low borrowing costs to increase infrastructure spending.

Such ideas are based on a nice sentiment, but fall short of sound criteria for big spending. If infrastructure is needed, if it is an essential element for aiding productivity and equity, then it should be done based on a proper cost-benefit analysis regardless of the borrowing costs.

It would be absurd to think that infrastructure spending on power generation, roads, rail and ports would not occur simply because interest rates were high. It is a similar story with low interest rates. Why borrow and build infrastructure that may not do much to boost productivity, efficiency and equity just because 10-year government bond yields are at 2%?

To see how infrastructure spending driven by low interest rates can go badly wrong, one only has to look at the experience in Japan.