Everyone stopped talking about government debt, but here's why it still matters

Wed, 19 Sep 2018  |  

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/government-debt-stephen-koukoulas-2018-9 

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Everyone stopped talking about government debt, but here's why it still matters

Having been a headline issue for many years, government debt no longer gets the media or political focus that is used to.

At one level, this is odd, because the level of gross and net government debt have continued to rise unrelentingly in recent years, with gross debt at a record high and net debt touching a peace-time high.

The lack of focus on government debt probably reflects the fall from grace of the chief debt fear-mongers Tony Abbott, Joe Hockey and Barnaby Joyce who were vocal advocates of the “debt and deficit disaster” that Australia was allegedly confronting five years ago. 

The fact that the Coalition government has demonstrably failed in its policy approach to the issue is also likely to be a factor why it has dropped off the list of popular political topics. It could also reflect the fact the belated realisation that Australia level of debt and deficit are, and always have been, low and manageable.

So low is Australia’s government debt, even today, that the three major sovereign credit ratings agencies have assigned a triple-A rating even though the path to a balanced budget and debt stabilisation has been slow and unconvincing.
This is not to say that the level of government debt is not an issue. It still is.

And just because it is not a constraint on the economy or a meaningful concern to markets, it doesn’t mean policy makers should take their eye off managing government debt, especially at the moment when the economy is growing and the global economy is giving Australia a helping hand.

Sensible and pragmatic economists are usually pragmatic about debt and deficit. Pragmatic in a sense that a move to debt and deficit are good policy when the economy is weak and debt reduction and surplus are good policy when the economy is growing strongly. Suffice to say it will be important to ensure that the path to small, but growing, budget surpluses over the next few years is kept, but only if the economy continues to grow at a reasonable pace.

If economic growth accelerates and the unemployment rate falls over the next couple of years, the surplus target should be revised up. This is the good news from the recent run of good economic news. Solid economic conditions will see the growth in gross debt slow and net debt fall.

This matters because without such action of locking in the surplus when times are good, there would be a growing risk down the track of a formal credit rating downgrade which would spill over to higher borrowing and therefore debt servicing costs for the government.

Interestingly, the looming Federal election will see fiscal looseness from the Coalition government pitted against a fiscal tightening from the Labor opposition.As we saw in the budget in May and from the hints Prime Minister Scott Morrison has given on income tax cuts, the Coalition seems willing to give up at least some of the windfall revenue that is currently flowing into Treasury coffers via the unexpectedly high price being paid for Australian iron ore and coal.

Labor, on the other hand, have signaled a range of tax policy changes that will see the budget bottom line improve – changes to negative gearing, dividend imputation refunds and capital gains tax concessions which will collectively raise close to $200 billion over the next decade.

To be sure, some of this revenue to Labor will be recycled back into Labor’s preferred projects during the course of the election campaign, but shadow Finance Minister Jim Chalmers has indicated that the budget bottom line will be better in every year in the forward estimates and out years with new spending to be less than the revenue derived from the proposed tax changes. Suffice to say, the good news is that with even luck and trend growth in the economy, the budget deficit will soon to disappear and the debate will soon turn to the appropriate size of the surplus.

This should ensure the triple-A credit rating is retained which will be good news for whichever side wins the upcoming election and the economy as a whole.

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