Andrew Robb has just given a speech about the need for a private debt market in Australia and what an incoming Coalition government would do to lower barriers to such a market developing. So far so good. But he has this throw away line that will cause much argument (and already has generated some hysteria on Twitter):
Our determination to start paying off Commonwealth net debt will of course see a commensurate reduction in the issuance of government bonds.
Well. Yes. A government running a surplus won’t need to issue as many bonds as the current government has to issue.
The other day I trawled through the Australian Office of Financial Management and captured Quarterly data on gross outstanding debt of the Commonwealth (central) government. Not a pretty picture.
Then I calculated the “Swan Contribution” by first calculating the average amount of debt during the Howard era and then subtracting that from the total. Let’s call that the Swan Excess Debt Curve.
As I’ve argued before:
Australia doesn’t just need a deep liquid government bond market it also needs a deep liquid corporate bond market. A large government bond market is likely to crowd out a corporate bond market. So government should sell enough paper to ensure a risk-free rate but leave the private sector to meet additional demand for Australian paper.
So back to the original point: Having a government bond market that is a fixed proportion of GDP is a good idea. Hopefully that implies that the dollar amount of gross debt rises over time (as GDP rises). Increasing debt levels to finance reckless spending, however, is not good practice. So the next time the government comes to the Parliament seeking to increase the debt ceiling, the opposition should fix the ceiling as a proportion of GDP and force the government to live within that constraint.
There is no reason to believe that the government bond market needs to be as large as it currently is. Any promise to cut debt and deficit must be understood as meaning that the government bond market will not continue to grow as a percentage of GDP. In the short run it will shrink.
As an aside, the always excellent Arnold Kling has an essay dealing with the “we owe it to ourselves” fallacy.