Wednesday, 16 May 2012


Former Howard Government Minister Amanda Vanstone has written an excellent op-ed piece for the Age on the state of government debt in Australia.

Forget about the Treasurer's pea-and-thimble surplus.  It is a farce and everyone, probably including him, knows it.  With a bit of paper shuffling he is promising to spend a bit less than he receives next year.  The real issue in Swan's budget is net government debt.
In 2009 Labor sought to lift the Commonwealth statutory borrowing limit from $75 billion to $200 billion - a 133 per cent increase.  With the global financial crisis looming, the Australian economy needed a cash injection.  Whether it needed quite as much is a moot point.  That billions of it was wasted in lousy programs and lousy management is undeniable.

One of the practical problems with stimulus spending is the task of retracting the extra funds from the economy when they are no longer required.  Theoretically, there should be a sharp short term boost in government spending to stabilise the situation, followed by a consolidation to pre-stimulus spending levels.

To implement such a strategy in practice requires a combination of political mettle and willpower.  It means prioritising some expenditures over others, and having the mental fortitude to reject many worthy but unaffordable spending initiatives.  On top of this, it requires deep cuts to the very programs that received significant funding increases as a part of the stimulus.

Unsurprisingly, many governments struggle to achieve this - they find it very easy to splash the cash around in response to a crisis, but very difficult to cut back afterwards.  Thus many 'temporary' stimuli are never properly withdrawn.

The Treasurer has often highlighted his two per cent cap on real annual spending growth as a mark of amazing fiscal rectitude.  But he uses as his baseline post-stimulus spending levels.  His idea of fiscal conservatism is to inject a huge stimulus into the economy, then limit further spending increases from those already meteoric levels and hope that revenues will eventually catch up.  True discipline would demand real cuts to nominal spending, returning the budget to something approaching pre-crisis levels.

The year that then-Opposition Leader Kevin Rudd declared "this reckless spending must stop", government expenditures were forecast at $235.6 billion.  Labor was elected just weeks after that famous speech.  In Wayne Swan's latest budget, spending was predicted to reach $376.3 billion. The debt continues to pile up, and the government continues to raise its own borrowing limit.

Last year Swan decided that rather than put our house back in order it would be a good idea to borrow more again.  He went for another $50 billion.  Now, he wants us to borrow more again.  Another $50 billion!  That will take the Commonwealth borrowing limit to $300 billion.  Swan wants to borrow four times what the Howard government was allowed to borrow.
The interest bill is more than $7 billion a year.  Let's put that in perspective.  When Swan was asked just last month why last year's bottom line forecast was out by more than $20 billion, he replied: "Six billion dollars for the reconstruction of Queensland was a pretty big hit."
So there you have it.  Every year we throw down the drain in interest "an unexpected disaster", more than the cost of rebuilding Brisbane after the floods.

Many commentators have argued that the current weakness of certain economic sectors demands continued deficit spending.  They assert that, compared to the rest of the world, our level of debt is relatively small.

By that logic, we will continue to be in fantastic fiscal shape until our debt to GDP ratio hits eighty per cent.  It took the Howard Government a decade to repay the $96 billion of net debt bequeathed to it by Paul Keating.  How long will it take to cancel out Wayne Swan's deficits?  How many billions of dollars will be squandered on interest payments?

The longer the government waits to begin paying down the debt, the more difficult and painful the task will become.  It is far too easy to become complacent about debt, particularly if you are leaving the hard decisions to the next government.

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