The Swan Excess Debt Curve

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.

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35 Responses to The Swan Excess Debt Curve

  1. Rabz

    … captured Quarterly data on gross outstanding debt of the Commonwealth (central) government. Not a pretty picture.

    Now that’s what I call a hockey stick…

  2. harrys on the boat

    Now that’s what I call a hockey stick…

    The seventh economic wonder of the world no less, Rabz.

  3. Always good to look at that graph in the context of private debt.

    For all the good that H&C did financially within the bounds of government, they presided over a massive increase in private debt levels that will kick us in the arse yet.

  4. duncan

    So drifty… do you think the private debt curve has reversed with Swanny spending the inheritance?

  5. No, the private debt curve has reversed with people switching to saving in the face of local and global uncertainty.

    Swan is just filling the gap like an idiot.

  6. switching to saving in the face of local and global uncertainty.

    And the higher future taxes the Trade Union Party has lumbered us with.

  7. On the assumption of government the Coalition should emplace a ‘Pay back Labor’s Debt’ levy and clear the thing in three years.

    At the moment.. that would be what, a 10% levy per year for three years? (GNI ~ $800B)

    Damn.

  8. Gab

    ‘Pay back Labor’s Debt’ levy and clear the thing

    What an excellent idea, in theory, except for those who live off welfare get off scott free. Maybe reducing their entitlements by the same amount as the levy. However, a levy doesn’t encourage reduction in overall govt. spending.

  9. I’ve suggested it before;

    Set up the “Wayne Swan Memorial Debt Trust (Slush) Fund”, flog it off on the international debt market, payable the day after they get voted back in in 2024…

    Let them clean up their own mess…

  10. Rabz

    ‘Pay back Labor’s Debt’ levy

    Levied on every member of the rudd/gillard gubberments, via asset and superannuation confiscation and then supplemented by hard labour in correctional facilities for the subsequent term of their natural lives.

  11. How about a raise in the GST rate to 15%. We could call it the Labor Levy.
    And also remove the exceptions to the GST.

    The idiots who thought Labor was a safe bet need to learn a good hard lesson. Those who didn’t, need to have it reinforced.

  12. Andrew Reynolds

    Sinclair,
    Fixing the ceiling at a zero net debt would be the fix – the government has an amount of debt out there but also has deposits and reserves sufficient to both pay it all off instantly and enough to cover likely increases or decreases in both revenues and outlays.

  13. Gab

    The idiots who thought Labor was a safe bet need to learn a good hard lesson.

    They’ll never learn because they don’t see debt as a problem: “a) just borrow more + b) someone in the future will pay if off just not me”.

  14. Scapula

    The main problem is not debt but the fact that we are almost five years into the ‘Great Recession’.

  15. Pedro

    I can’t much stand Rudd, so I didn’t watch Q&A for long, but when Turnbull mentioned the debt he was quick to remind us of the GFC and then to make the irrelevant point that the total debt is still small relative to GDP.

    When you look at your chart you’d think that we must still be struggling through the worst recession in yonks. It is amazing that more is not made of the debt trajectory.

  16. Scapula

    The world is struggling through the greatest recession since the Great Depression.

    A fact admittedly tempered somewhat in Australia by the mining boom.

  17. What an excellent idea, in theory, except for those who live off welfare get off scott free.

    No, 10% levied on all income.

  18. Fixing the ceiling at a zero net debt would be the fix

    And limiting expenditure to the revenues garnered the year prior…

  19. A fact admittedly tempered somewhat in Australia by the mining boom

    More so by a) reasonably high interest rates and b) that we haven’t had our property market collapse yet.

  20. “Great Recession”

    More spin…

    If you think this is a recession wait till the robots have replaced all the trade union jobs…

    Port of Brisbane, Port Botany, underground mining…

    The only jobs left will be fixing robots…

    http://studyat.anu.edu.au/majors/FEITMMCTR;overview.html

  21. Scapula

    Yes, Australia has got too limited an economic base for its current population and that’s why statistics are designed politically to hide underemployment.

    Yes, I think the real collapse of the Australian economy due to the GFC is only arriving and its arriving late because of the mining economy.

  22. Jarrah

    A great Kling article, thanks.

  23. .

    Yes, Australia has got too limited an economic base for its current population and that’s why statistics are designed politically to hide underemployment.

    Yes, I think the real collapse of the Australian economy due to the GFC is only arriving and its arriving late because of the mining economy.

    WTF?

    In terms of hours worked, marginal attachments to the labour force, discouraged workers and emigration, unemployment rose by about 3% in the GFC.

  24. Yes, I think the real collapse of the Australian economy due to the GFC is only arriving and its arriving late because of the mining economy.

    In terms of hours worked, marginal attachments to the labour force, discouraged workers and emigration, unemployment rose by about 3% in the GFC.

    These may both be true.

  25. With robot workers, we may have to buy our own and sublet them to mining companies etc.
    Every man an overseer.
    The individual gets to decide their own type of robot, pay for it, maintain it, and find work for it.

    Read an SF story with this as a peripheral story line many years ago but can’t remember the name.
    No it wasn’t the Robot series by Asimov, although all had to obey his Three Laws.

  26. Winston,

    Bought the wife a brand new robot that washes the clothes the other day, an LG.

    Fotunately Conroy will be turfed out before he can establish the National Robot Network.

  27. Jannie

    I habve been watching the antics of the unemployable tattoed greenpeace ‘activists’ at lunchtime (one wonders why they bother in the mall, they have the government for money).

    Maybe there is justice in leaving truckloads of debt for the youth to repay, after all. Some of them deserve it. But they will probably play the victim card, blame it on their grandparents and default on the debt.

  28. Entropy

    Or confiscate your assets

  29. Mother Hubbard's Dog

    The problem with a fixed debt ceiling is that a spendthrift government will simply put big ticket spending items off budget, like the NBN.

  30. Tel

    I like the “referism” idea.

    Every year, we have a ballot and every citizen writes down what they think is appropriate spending at the state and federal level. Then we pick the median value from the ballot that that’s what they get to spend. No more, no less.

    If most of the citizens are happy with where the spending is going they will tend to put down bigger numbers, if they are unhappy they will put smaller numbers.

  31. Tel

    I’ve mentioned elsewhere that upward slope on the red line is artificially increasing the value of the AUD, probably China is buying those bonds so they are once again in the business of currency manipulation — and Wayne Swan is in the business of helping them do that.

  32. sdfc

    Aussie CGS are highly valued by central banks, simple as that.

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