Do we have too much debt?

When it come to public debt I think everyone is talking at each other and not to each other. It is true that the absolute level of debt that the Australian government has is low – it is true that the relative amount of debt that the Australian government has is low. So what? The amount of debt isn’t the issue – it is what you do with the debt that matters.

I am not convinced that the quality of Australian government spending warrants having to borrow to finance that spending.

What is troubling is that the growth in Australian government debt has accelerated very dramatically.

The IMF, which has no political axe to grind, also noted Australia would have the third-largest increase in net debt as a share of GDP among the group of rich countries.

There is another way to look at debt.

Using IMF data for gross debt I compare Australia to the G&, the EU and the Euro Zone. Creating an index = 100 in 2001 I plotted the data through to 2014.

Debt comparison

The big fat blue line that declines to 2007 and rapid rises? That’s Australia. The other economies look like they are flattening out – Australia is still rising. To be fair – Australian public debt could rise for a long time before it hits European or American levels. But the threat remains:

Were GFC Mark II to unfurl itself — an ever-present danger given the state of the world’s banks and the as-yet-unknown impact of money printing in the US and Europe — Australia would be far less prepared than it was in 2008.

Unfortunately Joe Hockey talks a good talk but he seems to be in little hurry to reduce Australian government reliance on ever more levels of public debt.

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55 Responses to Do we have too much debt?

  1. Aussieute

    Sinclair I am not getting you thinking with a comment such as this.

    The absolute level of debt that the Australian government has is low.
    In relation /comparison to?
    The relative amount of debt that the Australian government has is low.
    Relative to what?

    Comparing debt levels with other counties is like patients in the oncology ward comparing the size of their cancers.

  2. Billy the Kidder

    Totally agree with Aussieute, but I would add that debt itself isn’t necessarily wrong but the way we were put into debt was for the wrong reasons and in the wrong way. $900 payments are a good example of that.

  3. Anne

    Comparing debt levels with other counties is like patients in the oncology ward comparing the size of their cancers.

    I think this is a pretty good analogy, Aussieute.

    The bigger the tumour the greater the odds the ‘patient’ will succumb.

  4. Dave Wane

    Apart from some road and bridge building, there is nothing that comes to mind that the Rudd-Gillard-Rudd Labor government spent our money and borrowed money on that was necessary. What have we got to show of any value after 6 years of these socialist fools? A debt spiralling towards $667 billion is the only thing that I can see. And it was set to further increase had Labor been re-elected.

  5. Aussieute

    +1 Billy the Kidder
    Debt is a short term solution to a funding issue
    10+ year terms are equity/capital structural issues and require fundamental changes in the whole income/expenditure cycle.
    This applies to government as well as business.

    I also see this relating to the brilliant The Black Knight fight.

  6. I never get a coherent answer to this question – perhaps I’m talking in Swahili – but why don’t we have money in the bank instead of having to borrow all the time? Is it to subsidise the banks? Why aren’t the loose shekels in our pockets instead of Daddy Warbucks?

  7. The big fat blue line that declines to 2007 and rapid rises?

    a) Gross debt is not a problem. It’s net debt that can cause a problem. The average punter with a mortgage will have tremendous gross debt. That doesn’t mean they’re in trouble of going bankrupt; they have a massive asset to offset it. The question is whether holding those assets is the best strategy (which like when considering the family home, isn’t necessarily determined by the direct income derived from the asset).

    b) So Australia had a lower level of debt before the financial crisis, and therefore the fiscal hit it took was proportionally bigger when compared to their pre-crisis debt? Whoopty doo! You might have made a scary looking graph but your numbers don’t mean we have a debt problem.

  8. Boyfromtottenham

    Don’t fall for the clever trick of comparing Australia (with low, manageable debt), with the G8, US, EU, with out of control debt! It’s like saying I should be like all my mates who have flash cars and big houses while ignoring the fact that they are mortgaged to the kazoo and will crash and burn during next downturn. Talk about a dumb line of argument.

  9. JC

    Desi

    Gross debt is the problem, you dill. You think if we have a debt crisis there would be enough jobs for graduates that have accumulated a HECS loan for instance?

    Stop being an idiot.

    Furthermore the problem with Australian debt isn’t just what the Commonwealth carries on its books, but we also have an issue with the debt held by the states.

    There’s no way the Federal government would look the other way if a state government defaulted. Consequently we have an implicit guarantee for the states.

    Try to imagine the situation if say our largest state defaulted on its debt and what it would mean for the rest of Australian debt. We’d be fucked all round.

    You need to stop peddling Liars Party talking points, champ.

  10. JC

    Don’t fall for the clever trick of comparing Australia (with low, manageable debt), with the G8, US, EU, with out of control debt!

    ‘sactly. That’s the fraudulent disgusting crap the Left try and peddle here. Oh Looksee, we’re much better off than the Euroweenies and the Americans. Well you fucking arseholes, of course we should be seeing we just went through a commodity boom of biblical proportions. In fact we ought to be comparing with places like Singapore, Hong Kong etc.

    The left also apply the OECD yardstick, fully understanding that the OECD is choked with Euroweenies and the US.

    Seriously, the Left needs to be Fisk Doctrined out of existence. Failing that, sending people like Desi to the salt mines with a shovel wouldn’t be a bad idea… and it wouldn’t be 8 hours shifts 5 days a week either. IT would be 7 days 16 hour shifts.

  11. Andrew

    Comparing debt levels with other counties is like patients in the oncology ward comparing the size of their cancers.

    I think this is a pretty good analogy, Aussieute.

    It’s actually worse than that. We have very very high debt – one of the highest, and up there with Italy. Only the mix is different – public / private skewed to private. We’re the guy in the oncology ward with the huge lung cancer boasting how much smaller our secondary brain tumour is compared to the next guy.

    Also, if Abe conceded defeat today, repudiated the Japanese debt and started GFC2 (actually GFC3, with GFC2 being the 3 year Gillard Financial Crisis where our unemployment soared) what would happen? Our automatic stabilisers would kick in, fiscal stimulus piled on top and our deficit would hit what, 10-11% of GDP? My guess is we would hit Spain’s exit point by around 2017 or 2018 at that rate. Does that sound right to the full-time economists out there?

  12. You think if we have a debt crisis there would be enough jobs for graduates that have accumulated a HECS loan for instance?

    If the economy doesn’t ever recover enough to supply jobs to graduates to enable them to pay off their HECS debt at some point over the course of their 40-50 year careers then we’ll have far bigger problems than unpaid HECS. There seems to be a tremendous amount of effort going into imagining some sort of “debt crisis”.

    You need to stop peddling Liars Party talking points, champ.

    You realise that after the last election campaign and this latest budge the “Liars Party” title clearly belongs to Tony Abbott and the Liberal Party right?

  13. wreckage

    There is absolutely no reason for a non-wartime government to be paying cost of finance.

    It is a pointless, optional expense that can be avoided entirely.

    It’s like saying “It’s ok, our politicians danced naked around a SMALLER bonfire of other people’s money”.

    Further, since borrowing shunts the expense forward, it is undemocratic; the people expected to pay are never given an opportunity to vote on the expenditure. I would say that under all circumstances government borrowing is, therefore, unethical.

  14. wreckage

    desipis; the LNP lie opportunistically, rather than as a universal matter of policy and a requisite moral imperative at the personal level.

    “The Liars Party” isn’t name-calling. It’s their only consistent policy, and a recruitment slogan.

  15. Mk50 of Brisbane, Henchman to the VRWC

    Ye Gods and little fishes people.

    It’s not like we have not been here before – and it’s precisely why Hockey and Abbott are doing the right thing, at probably the right pace. After sterling was floated in 1919, British authorities were anxious to develop closer cooperation between British and Dominion financial institutions to prevent serious divergences in currency value. The British requests for Dominions to build up sterling reserves in London rather than gold reserves meant that the Commonwealth Bank had to take on greater responsibilities. The Bank had become the Federal Government’s banker during the 1914-19 war and was strictly orthodox, going so far as to slow down credit availability in Australia in 1923-24 in order to maintain the high value of the Australian pound. The Commonwealth Bank received some of the powers of a central bank in 1924 and relations between it and the Bank of England grew very close during the late 1920s. The war had drastically reduced Australian exports to the UK but these rebounded quickly postwar. Australia focused resources on expanding the agricultural sector to allow for more exports and more migration, this required infrastructure and this needed loans. Yet world trade in agricultural goods was slow in the 1920s and even with the Empire Settlement Act migration did not reach 1913 levels during that decade. Australia absorbed loans during the 1920s, but used them to pay for imports. Debt repayment as a proportion of export income rose from 17 percent in 1920 to 28 percent in 1929, Australian extravagance was the talk of London.* The Bank of England was pressing for moderation, Australia was borrowing to pay interest, and then the 1929 crash occurred. By 1930 export prices had dropped by 23 percent and they declined for another three years straight.

    Australia experienced a simultaneous drop in export earnings, a credit squeeze, a drop in imports and a crisis in overseas loan repayments. Worse, much of the debt burden was short term loans. The Federal government wished to avoid a nationalist response and to discipline the states, who had over borrowed to a serious extent. They asked for the assistance of the Bank of England, who sent Sir Otto Neimeyer out to advise. His advice was orthodox and included a cut in living standards and devaluation. After politicking, the Premiers Plan of 1931 accepted the orthodox medicine Neimeyer offered. The powers of the Commonwealth Bank increased over this period, ensuring that Australian policy reflected an internationalist frame of reference for financial and economic matters. The Commonwealth Bank (with the occasional assistance of the Bank of England) pegged the ratio to the British pound at £125 Australian to £100 Sterling.

    So there is nothing new in what those blithering idiots Krudd and the Lying Slapper did and it looks like Hockey knows this and is aiming for structural change to prevent the sort of social disaster that happened in the early-mid 1930s in this country, which takes time (and politics is the art of the possible). To be blunt, all Australians are living beyond our means and we need to cut standards of living (says he who cancelled his first ever overseas holiday since 1978 to pay down debt instead).

    Meanwhile, not one of the folks here has seen the flare-lit elephant painted electric green and tapdancing in a hop hat which the budget contained.

    A little hint.

    What is the single most important responsibility of the Federal Government?

    Sheesh.

    * See CAIN, P.J., and HOPKINS, A.G., British Imperialism 1688-2000, (Second Edition), Longman, Harlow, 2001, p.494

  16. Tel

    It is true that the absolute level of debt that the Australian government has is low

    Last I checked in absolute terms it is the highest it has been in all of our history. There’s a chart of the country’s debt and it’s pretty clear where the trend is going.

    http://www.tradingeconomics.com/charts/australia-external-debt.png?s=australiaextdeb&d1=19880101&d2=20141231

    Maybe you mean government debt-to-GDP ratio, that’s not absolute terms, but it’s a good metric. Even in that case we are sitting comparable to 1996 and the end of the Keating government. I wouldn’t call that low.

    – it is true that the relative amount of debt that the Australian government has is low.

    What does this even mean? Relative to what? Indeed our debt is relatively low compared with the moon, but when compared with my intention to ever pay it back (which is extremely low) that debt may appear high.

  17. John Commenus

    Correct me if I am wrong, but I am very angry with Abbott and the LNP. They told me before the election that they were not going to increase taxes and would cut spending. Instead they will be the biggest spending and highest taxing Federal Government in about half a century. They are as fiscally conservative as Kevin Rudd. I am horrified that I voted for them.

  18. Tel

    You realise that after the last election campaign and this latest budge the “Liars Party” title clearly belongs to Tony Abbott and the Liberal Party right?

    It is getting difficult to tell one from the other; I believe Abbott has delivered broken promises, but never actually stood in parliament and lied about “never doing anything wrong”, unlike a certain ex-ALP member.

  19. Tom

    Gross debt is not a problem.

    FMD, where do the left dig up these mooching ferals.

    We’re pissing half our defence budget against the wall just servicing the Liars-Greenfilth debt, you clown. That’s 30 per cent of cost of the age pension.

    Which one of the Liars-Greenfilth tax-eaters in Canberra do you work for? Or are you just a bog standard university troll?

  20. Notafan

    Where are the growth areas in spending? It’s not PPL and the infrastructure announced in the budget, is it education, welfare and health that have been already committed to such as Gonski and NDIS?
    Have Abbott and Hocket have said when Gonski finishes and our current funding arrangements finish the states can take full responsibility for rising costs, and therefore be responsible for the changes to GST?

  21. RodClarke

    You have also got to include in that debt figure at least 80% of the money the government has spent re-building the internet (the NBN) .Afterall thats how far behind the NBN is in the roll-out.

    The’ll never re-coup that money

  22. Neil

    According to Stephen Koukoukalas we do not have enough debt. Kouk does not say how much debt we should have but according to koukamaniac we do not have enough debt

    http://www.abc.net.au/lateline/content/2013/s3751658.htm

    The problem with the Australian level of gross debt now and this is the Basel three requirements for looking after banks in the post GFC world is we don’t have enough debt.”

    Is this man insane???

  23. Grigory M

    Is this man insane???

    Absolutely. Insanity was an essential pre-requisite to being an adviser (reputedly on matters economic) to a recent former occupant of The Lodge. He demonstrates classic symptoms – Kouk by name and by nature.

  24. GleamBright

    ‘Further, since borrowing shunts the expense forward, it is undemocratic; the people expected to pay are never given an opportunity to vote on the expenditure. I would say that under all circumstances government borrowing is, therefore, unethical.’

    Well done Wreckage, you’re right on the money about it being unethical – and this is also the problem with democracy, since by definition there is always a portion of the population that would have voted against the expenditure, and thus have had their rights violated. This principle applies to every other aspect of government activity also.

  25. Habib

    Governments should be constitutionally unable to generate debt. Full stop.

  26. Dan

    This is just federal debt. Add on all the state debt and the picture changes dramatically. Nearing that 90% GDP

  27. Grigory M

    Governments should be constitutionally unable to generate debt. Full stop.

    I don’t see it as a problem for the funding of the Government’s capital works programs, where the works undertaken have future benefits streams that can be aligned with repayment periods. These programs rely on private enterprise to tender for and undertake the works involved, and are therefore widely beneficial to the economy during their construction phases. Australia has not, for many years, used major government day labour forces to do these works – they are, almost exclusively, overseen by relatively small government units while being directly controlled by managing contractors from the private sector.

  28. Notafan

    When will the public ever say government should spend less on health and education?
    Teachers seem to have State governments over a barrel, with no ability to remove poor performers, demands for ever decreasing class sizes and a curriculum that is focused on lefty talking points. in Victoria we also seem to have an oversupply of teachers. Given that educational outcomes are de-improving, you’d think someone could give that sector a nice haircut.

    At least the State government seem to be holding out against the demands of the ambulance union.

  29. Grigory M

    in Victoria we also seem to have an oversupply of teachers

    According to my recently retired teacher neighbor, Universities in NSW are graduating some 5,000 new teachers per annum and very few of them are able to find employment as teachers.

  30. Habib

    What capital works does government carry out that can’t be done by the private sector?

  31. sdfc

    Roads, rail, water and electricity distribution. Pubic health and education. Stuff like that.

  32. Grigory M

    What capital works does government carry out that can’t be done by the private sector?

    Habib – I fear you are under a misapprehension. Government may borrow the money for capital works, but it doesn’t actually carry out the works. Those works are put out to tender and are carried out by the private sector. In almost every case.

  33. wreckage

    Roads, rail, water and electricity distribution. Pubic health and education. Stuff like that.

    You realise there’s not one item on that list that hasn’t been successfully done privately?

  34. Notafan

    5000?
    Mr Pyne better get the focus on creating opportunities for businesses to grow and job creation otherwise earn or learn is going to be disastrous.
    We seem to have a massive oversupply of journalism and teaching graduates, perhaps Mr Pyne can give tertiary institutions another haircut.

  35. sdfc

    Yeah and they are pretty much always subsidised.

    Tell us about your plan for an unsubsidised private water utility in Australia. And tell us your plan for a competitive market in water. Multiple networks?

  36. hzhousewife

    According to my recently retired teacher neighbor, Universities in NSW are graduating some 5,000 new teachers per annum and very few of them are able to find employment as teachers.

    and plenty with Psychology degrees too………

  37. Andrew

    Is this man insane???

    Yes.

    Read some of his pre-Xmas ravings. The economy is going so brilliantly well in EVERY sector with soaring inflation that we should be raising rates towards 4% by now. (They should have already gone up at the Feb meeting.) In fact, the same fuckwitted advice he gave Senior Labor Figures previously, which saw them implement “inflation fighting” policy stances after the US was already in recession, while the financial system was toppling, and driving the $A up. See for example the laughably inappropriate May 2008 Budget, as well as the spanking given to the Goose by the RBA in July 2008.

  38. Andrew

    Pubic health

    I’m pretty sure the private sector handles that too

  39. Habib

    Contract utilities out, with ratepayers allocating the tender every three years or whatever. I reckon Halliburton could maintain my street, pick up my crap, supply potable water and pipe away my richards for a fraction of what the BCC charges. Should they want to build some idiot bikeway or unvisited gallery of talentless dross it’d come off their margin. Besides defence, there’s nothing government does that can’t be done better and cheaper by professional providers.

    They don’t even do defence very well, on a purely pragmatic basis mercenaries are a cheaper option, with less political bollocks should you decide to deploy. Pick the right ones, such as the Gurkhas, and you have a professional, loyal and terrifying force for the right money, and no need for a plague of public servants.

  40. Tel

    Tell us about your plan for an unsubsidised private water utility in Australia. And tell us your plan for a competitive market in water. Multiple networks?

    Errr duh! Allow people to have rain water tanks and in-ground sewage tanks without government interference.

  41. Grigory M

    Halliburton

    WTF? Are you Dick Cheney?

  42. Habib

    No, but what’s wrong with Dick Cheney, especially in comparison with Hairplugs?

    Halliburton was just an example of the large number of professional providers who could carry out every single task that’s currently incompetently and expensively mishandled by local “government”. Ditto for states, and the commonwealth which duplicates their dithering and deficiency.

  43. Tel

    http://www.armytimes.com/article/20110406/NEWS/104060309/KBR-wants-Iraqi-law-used-electrocution-case

    KBR attorneys have argued that three military investigations have determined no one agency or company is to blame for the Maseth’s death, which spawned a military review of 17 other electrocution deaths in Iraq and prompted electrical repair work at military facilities, much of it by KBR.

    Cheryl Harris, the mother of the Green Beret, and her attorney said they believe KBR is trying to delay the lawsuit and evade responsibility.

    “My emotional response is just the frustration of being here for three years, of the length of time it takes, and the stalling tactics that KBR continues to take,” she said at the hearing.

    She said American soldiers deserve to be protected by American laws and safety standards, even in foreign lands.

    Just because the government is paying private contractors does not magically make their work any better… the ALP “Pink Bats” scheme also paid private contractors with well known problems resulting. Halliburton got a lot of “no bid” contracts, that did seem suspiciously linked to crony capitalism and outright corruption. The only time you get good results is with a competitive market where each buyer makes a decision for themselves. The magic of the marketplace does not come by slapping a label “private” on a government department and then continuing to run it with monopoly powers, what works is individual free choice.

    In Australia I suggest that smaller council regions would make sense, and more autonomous with the ability to run local infrastructure (like low-voltage electricity distribution) or contract it out. This requires a lot of engagement from the people in that area to keep an eye on what their council is doing, else corruption sets in rapidly. Smaller councils are probably going to be watched more closely because their decisions are more immediately felt. There will be the consequence that some local areas will turn to shitholes as the residents can’t get their act together, but at least there will be other local areas that can act as an example to show others how to do it.

  44. Tel

    They don’t even do defence very well, on a purely pragmatic basis mercenaries are a cheaper option, with less political bollocks should you decide to deploy.

    As Machiavelli explained, you can pay a man enough to kill for you, but you can’t pay him to die for you. People defending their own homes will always fight harder than people paid to turn up on the day. I guess we will see how Blackwater does in the Ukraine (yeah, yeah, I know, they aren’t officially in the Ukraine, hush).

  45. Habib

    As I said, have a discriminatory policy with hiring. The Gurkhas, and to a lesser extent the Dayaks in the Sarawak Rangers and the Montagnards in Tiger Force were ferocious, and loyal. I’ve no issue with Diggers, I’m an ADF officer myself; the odd git like numbers slips through, and Russell has more blithering bolsheviks than many sociology faculties.

    As to KBR etc being involved in cronyism, of course they will if that’s what’s required to seal the deal. Hence my idea to take politicians out of the loop. End users want the best service for the lowest price, and aren’t going to grease some spiv to get it. Anyone who doesn’t give a shit (or doesn’t pay) has no say on who gets the gig.

  46. Alex Pundit

    Saying that it is okay that OZ has the lowest level of debt compared to other countries is like saying it is okay to be sick, as long as you aren’t the sickest person in the hospital.

  47. Squirrel

    With the huge revenue windfalls from the mining boom, the peak earning and tax paying years of the Baby Boom, and the massive household borrowing and spending binge, the Australian government sector should be comfortably in the black. Sadly, Commonwealth, State and Territory governments have all over-spent and over-promised – treating unsustainable boomtime revenues as the new normal – and reality is now catching up with us. The Sunday gathering of State and Territory leaders will be the first of many reality (and denial) sessions.

    What truly astonishes and depresses me about all of this is the absolute refusal of supposedly smart people to face up to the precariousness of our situation – we are, as a nation, massively indebted and pathetically uncompetitive in so many respects.

  48. I am the Walrus, koo koo k'choo

    What truly astonishes and depresses me about all of this is the absolute refusal of supposedly smart people to face up to the precariousness of our situation – we are, as a nation, massively indebted and pathetically uncompetitive in so many respects.

    Agreed. The general complacency is disturbing. The ‘no crisis’ politicking by Wee Willie and Loopy Clive is completely irresponsible.

    MK50 – I saw it. And thank heavens for it. More please!

  49. outsider

    It appears no one is doing much more than playing politics around the fringes, not facing facts on the economic SOP and outlook – she’ll be right, mate. The polls indicate scant respect for even a small correction to expenditure. It’s time for more ALP/Green medicine. Let then finish the job, and in so doing, finish themselves for good in public esteem. If TAS can get the message, so can the country as a whole. It often takes a couple of shit sandwiches.

    That is what 20 years of growth buys you – complacency. So for the swirling state of our politics, we need courageous politicians able to see past their (and Treasury’s) noses. Progress in any field is seldom linear – our best bet is reculer pour mieux sauter, in the form a DD. Give Aust the choice Romney gave the US; see if the place is up for it, or wants to join the others in the pond of raw sewage at the bottom of the paddock. To compete with Asia you have to think and work like they do – no dicking around, no time to waste.

  50. samuel j

    To be fair, though, the major changes are the rate of indexation and other benefits which will show a much slower growth rate. He has at least addressed the structural failings left by Labor.

  51. wreckage

    Tell us about your plan for an unsubsidised private water utility in Australia. And tell us your plan for a competitive market in water. Multiple networks?

    Everything you mentioned has been successfully privatised at least once, which means raising them as ironclad objections is question-begging. Now your argument is that if I can’t lay out a full commercial plan for network sharing my argument is invalid??? Sorry mate, that’s a red herring on top of question begging.

    I usually read your posts with interest. This is just disappointing.

  52. Adrian

    if we can’t even cut 1.7 per cent from a $414 billion budget, then what hope is there for this country!!!!!!!

  53. .

    desipis
    #1308646, posted on May 17, 2014 at 2:11 pm
    The big fat blue line that declines to 2007 and rapid rises?

    a) Gross debt is not a problem. It’s net debt that can cause a problem. The average punter with a mortgage will have tremendous gross debt.

    You moron. You don’t get it. You can be illiquid and face very high interest payments.

    Your financial advice is as good as Craig Thomson’s advice to avoid being caught by the Police.

    Please shut up about public finances. What you say is dangerously stupid.

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