This article first appeared on the Yahoo 7 Finance website at this link 


Do we need to be worried about government debt?

Here’s a question for those worried about government debt. Which side of politics is racking up debt at a faster pace – Labor under Rudd and Gillard or the Coalition under Abbott and Turnbull?
The answer would surprise most people – it’s the Abbott / Turnbull Coalition government.

Remember when the Labor government was being slammed by the Coalition for creating a “debt and deficit emergency”, Labor were a “budget disaster” and “addicted to borrowing and spending”?

Well, it seems that the Coalition now has a debt problem.

The Labor Party was in government for 70 months from November 2007 to September 2013, during which time gross government debt rose $320 billion. A mix of collapsing revenue from the terms of trade slump plus the huge fiscal policy stimulus associated with the global financial crisis accounted for the bulk of the rise in debt. The rise in government debt averaged $4.6 billion a month for those 70 months.

Recent data from the Australian Office of Financial Management shows that the Coalition government have been racking up debt at a faster pace than Labor. In the 38 months the Coalition has been in power, government debt has risen by $185 billion which is an average increase of $4.9 billion a month.

The average monthly addition to government debt is therefore $300 million more under the current Coalition government policies than it was under the previous Labor government. That’s around $10 million a day of extra government borrowing, every day, under the Coalition than was the case under Labor.

This debt binge under the Coalition is despite solid revenue growth every year it has been in office, huge dividend payments from the Reserve Bank and record low interest rates which reduces the interest cost on new government debt.

The government’s own projections, which will be updated next month when it releases its Mid Year Economic and Fiscal Outlook, shows that gross government debt will exceed half a trillion dollars within two years and will keep rising after that.

It is clear why the ratings agencies are increasingly anxious about the level of government debt and the strategy to stem the rise. The triple-A credit rating of the government is, as a result, under pressure. While a credit down grade would not be a disaster in itself, it would be a symbol of the erosion of confidence in the Australian which is showing up in rising bond yields and a lower Aussie dollar.

The path to budget surplus and a containment in government tough is challenging. It looks like the Coalition will get some luck with the current surge in commodity prices – coal and iron ore in particular – which will yield a windfall gain of extra tax revenue.

There will be an offset to this good news with the weakness in employment and record low wages growth which is working the other way to undermine tax revenue. At a time when the Coalition is spending at a rapid rate, the jury is out on the pace and extent to which the budget deficit is shrinking.

All of which goes to the point that the Coalition has been accumulating debt at a rapid pace over the three years and has not found a way to stem the increase debt despite its promises to do so. That fact that debt is rising faster under its policies than under the previous Labor government suggests its economic policy strategy is in need of a major revamp.