Australia and Lithuania: equal debt wooden spooners

Now us arm-chairers at the Cat have always maintained that it is not really the current level of debt that matters but its trajectory.

Swanny was always bragging about Australia’s relatively low government net debt – which took quite a hide since he had inherited this position – but the real trouble was that the debt position was heading in the wrong direction and there was nothing to show for it.

Now no one in their right mind would take economic advice from the IMF – unreconstructed Keynesians to a person; isn’t it about time Blanchard retired? – but as a record keeping, it’s probably OK.  So check out the article below.

It seems that the rate of deterioration of Australia’s net debt to 2020 puts on a par with only Lithuania, with most other countries reducing their net debt positions.  Our cousins over the ditch are about to leapfrog us, with lower net debt.

But check out this fantasy stuff  from Abbott about what surpluses will do – he may as well being talking about the Tooth Fairy and Father Christmas.  Even if the Abbott government were to be re-elected – and that is a big if – there is no doubt that the Coalition will do a Swanny and fail to achieve a single budget surplus during its terms in office.

And note to Abbott: Swanny also predicted declining deficits ending in surpluses.  And we know where that ended.

(Cats: can anyone explain to me the big emphasis on the iron ore price driving budget outcomes apart from the obvious political spin line that: well, we can’t control iron ore prices, so we will have to write $30 billion off the forward estimates.  I see the link with company tax, but that is not that large, so what is the rest of the impact?)

Here is the piece from The Fin:

Australia will suffer the developed world’s most dramatic surge in debt by 2020, according to an International Monetary Fund report that slams governments for failing to save enough during boom times.

In a damning assessment of budget policy over the past three decades in advanced economies – including Australia’s – the fund berates politicians for overspending during good times rather that preserving their ability to spur growth when inevitable downturns hit.

Prime Minister Tony Abbott insisted on Wednesday the government’s budget strategy would not involve major spending cuts or increased taxes, despite collapsing iron ore prices wiping $30 billion from the forwards since last May.

“Each year will bring us closer to a surplus – a surplus that means that debt will actually start to reduce rather than simply grow at a slower pace,” Mr Abbott said.

“A surplus that means the interest bill will start to reduce rather than grow every year.”

However, the IMF’s data shows Australia’s net debt to gross domestic product will deteriorate rapidly over the next five years.

Debt will grow 32 per cent to 22.4 per cent of GDP in 2020 from 17 per cent at the end of 2014, the IMF estimates.

Only Lithuania comes close to facing such a deterioration, with debt expected to jump 26 per cent.

Australia’s increase will also be more than 10 times the 3 per cent rise expected in the United States, while the bulk of the world’s advanced economies have rearranged their budgets to produce declines in debt burdens. Germany’s debt-to-GDP will fall 25 per cent to 37.1 per cent.

Most striking is New Zealand’s net debt – currently 52 per cent greater than Australia’s – and now tipped to fall below Australia’s level by 2018, according to the IMF calculations.

Strife-torn Greece will reduce its debt level by a similar proportion to Australia’s projected rise.

The figures come amid fresh signs of budget anxiety, with Westpac’s monthly sentiment index of households falling 3.2 per cent this month into negative territory again.

“This is a disappointing result,” said Westpac chief economist Bill Evans, who said he would have preferred to see further gains in the lead up to next month’s budget.

Criticism by the IMF of how governments have handled boom-and-busts over the past three decades coincides with renewed attacks on the legacy of the Howard and Costello era, when the commodity price boom allowed the Coalition to deliver massive tax cuts and drive up spending.

In its latest Fiscal Monitor, the IMF lambasts governments for failing since the mid-1990s for a lopsided approach to the use of so-called “automatic fiscal stabilisers”.

During downturns, governments allow budget deficits to widen as a way of supporting economic growth by avoiding new taxes or spending cuts. Conversely, during good times of unexpected revenue booms – something Australia experienced between 2003 and 2011 – governments should save the funds by rebuilding surpluses and restoring their ability to weather future economic storms, the IMF argues.

“Automatic stabilisers have played an important role in fiscal stabilisation,” the fund’s economists write in the report. “However, they have generally not been allowed to play fully in good times, because spending a portion of the revenue windfalls is tempting.”

The resulting “asymmetry” in the way governments respond to either positive or negative economic shocks prevents budget buffers being restored when growth is strong, they said. This can “contribute to significant accumulation of public debt over time”.

Former treasurer Peter Costello has been attacked this week for squandering the unexpected windfalls of the first-leg of the commodity-price boom, particularly in the 2006 budget which delivered massive tax cuts and entrenched overly generous superannuation concessions.

The IMF says improving the way governments manage budgets could reduce the impact of mistakes on economic growth by as much a 20 per cent.

“Reduced volatility and uncertainty could in turn foster medium-term growth,” the fund says.

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33 Responses to Australia and Lithuania: equal debt wooden spooners

  1. mundi

    It is absolutely despicable that they blame Howard/Costello while never mentioning the increase in spending.

    So Howard and Costello were meant to have saved $500b?+

    Is the IMF just some sort of international leftist group? Why are they constantly attacking Howard?

    The last time they bagged Howard they misread their own reports – who poor the blame on the labor state governments who dramatically increased spending and debt under Howard.

  2. Baldrick

    Prime Minister Tony Abbott insisted on Wednesday the government’s budget strategy would not involve major spending cuts…

    Without doubt the worst non-Labor government since Federation.

  3. mundi

    I also laugh at the claim that Howard/Costello ‘entrenched’ tax cuts and and concessions…. As if they are set in stone and immutable by future parliaments.

  4. Zippy The Younger

    Swan is denser then plutonium, so in fact are most of the left

  5. Infidel Tiger

    I long for the steady funds of Gillard/Rudd/Swan at the tiller.

    Abbott and Hockey are absolute disgraces. They should be fired by trebuchet into a wall.

  6. Natural Instinct

    FY2015-16 Expenses
    $___m (2015, Hockey)
    $431m (2014, Hockey)
    $431m (2013, Swann)
    $439m (2012, Swann).
    .
    Come on Tony just one dollar less than Swanny.

  7. Zippy The Younger

    I also laugh at the claim that Howard/Costello ‘entrenched’ tax cuts and and concessions…. As if they are set in stone and immutable by future parliaments.

    What they entrenched was the worst form of Marxism since 1917. massive middle class welfare.

  8. Dr Faustus

    Former treasurer Peter Costello has been attacked this week for squandering the unexpected windfalls of the first-leg of the commodity-price boom, particularly in the 2006 budget which delivered massive tax cuts and entrenched overly generous superannuation concessions.

    This is complete, knowing bullshit. The “unexpected windfalls” of the commodity-price boom started rolling in in after 2005/6 and landed in the tin from 2007 to 2013 – only to be wasted by Rudd, Gillard, Swan and the many other pox drops of the ALP.

    Trivially easy to prove (ABS 5302, table 7)- impossible to contradict.

    Always reluctant to cite Wikipedia as a source, but the graphs down the RHS are based on the ABS Export series and instantly show the real ‘windfall’ story beyond any rational debate.

  9. Dr Faustus

    I long for the steady funds of Gillard/Rudd/Swan at the tiller.

    Gillard/Rudd/Swan certainly had ‘steady funds’. Bastards.

    Abbott, Hockey and every other pig at the public trough should have been able to look at the graphs I linked to above and realised that there was a sustainability problem. Did they really think that China wanted to fund Australian social spending for the next 20 years.

    A trebuchet is too good for them…

  10. Jock

    Reducing tax is never a bad thing. But I should add never stand between a politician and a bucket of our money.

    Howard had the right idea. Why fix things so the other side can piss it away? He and costello reduced taxes which were hitting over 25% of GDP. A good move.

    Joe should play the game. Fix the bracket creep and leave the rest. Labor thinks there is no problem. They will know better when they win power. (which they will eventually)

  11. thefrollickingmole

    Lets not forget Wane was “treasurer of the year” for being a squandermonkey during the GFC.

    They cant backtrack now or they would have to admit keynesian squandering is a busted orthodoxy.

  12. Mr Rusty

    Australia will suffer the developed world’s most dramatic surge in debt by 2020, according to an International Monetary Fund report that slams governments for failing to save enough during boom times.

    It;s not the job of the Government to save money, that is for the indivdual. Anyone name a Government that actually SAVED money? Anyone? Anyone?

    Oh hang on…wasn’t there that Peter Costello fella? How is his legacy being looked upon at the moment?
    Anyone? Anyone?

  13. Phillip

    Amazing the concept that returning money to the taxpayer is “squandering” it.

  14. Norma

    Strife-torn Greece will reduce its debt level by a similar proportion to Australia’s projected rise.

    hahahahahah

  15. Sydney Boy

    Q. What is the big emphasis on the iron ore price driving budget outcomes?

    A. An excuse.

  16. H B Bear

    Australia has been squandering booms since the 1800s. This should come as no surprise. About all we have to show for it is a bunch of ornate buildings in the Victoriastani capital.

  17. H B Bear

    What they entrenched was the worst form of Marxism since 1917. massive middle class welfare.

    We are all still paying for Howard’s last two election victories.

  18. Andrew

    Those absolute fucking grubs – revenues increased about 3% of GDP, we ran debt down to zero, ran a 1% surplus and then “spent” the rest on tax cuts. At the “top of the cycle” where were the other countries running bigger surplii?

    Mind you, we can’t blame the ignorant pseudo economists at the IMF for accusing JWH of “spending” when even Cats don’t understand the difference between “spending” and “spending measures” that are actually tax cuts. Family Tax Benefit, private health insurance rebate etc are of course lowering of taxes, not “spending” as almost zero is “spent” (consumed).

  19. .

    Andrew
    #1657658, posted on April 16, 2015 at 10:51 am
    Those absolute fucking grubs – revenues increased about 3% of GDP, we ran debt down to zero, ran a 1% surplus and then “spent” the rest on tax cuts. At the “top of the cycle” where were the other countries running bigger surplii?

    We also had a future fund etc didn’t we?

  20. Ralph

    I also laugh at the claim that Howard/Costello ‘entrenched’ tax cuts and and concessions…. As if they are set in stone and immutable by future parliaments.

    Any government that can muster up the courage to undo this will probably win the grudging respect of a significant majority of Australians and set themselves up for a long term in office. Bariatric Joe stamping his foot, saying it must be so and whingeing about how tough his charmed life is is not the way it’s going to happen though.

  21. Andrew

    Is the IMF just some sort of international leftist group?

    Ummmmm, really?? That’s even a question? They
    – like the Goose
    – are run by a French socialist
    – support stimulus even when Goose spent his at the peak of the cycle
    – condemn the GOP for cutting the massive deficit
    – love carbon pricing
    – want to give money to the UN

  22. Andrew

    last time they bagged Howard they misread their own reports – which pour the blame on the labor state governments who dramatically increased spending and debt under Howard.

    While on the subject, have a look at the revenue growth of the poor States. It’s like 25% pa nominal!

  23. sfw

    Good speech by the NSW finance minister on Quadrant – https://quadrant.org.au/opinion/qed/2015/04/peoples-money-runs/

    When he walks the walk rather than talks I’ll believe that he believes it.

    Asides from being a liar Abbott is pretty well useless. An incompetent leading a crew of dunces.

    We’re doomed.

  24. Squirrel

    “…“Each year will bring us closer to a surplus – a surplus that means that debt will actually start to reduce rather than simply grow at a slower pace,” Mr Abbott said.

    “A surplus that means the interest bill will start to reduce rather than grow every year.”…

    Only if the mirage-like surplus miraculously happens to be larger than the annual interest bill in the year in which the surplus occurs – otherwise the Government will still need to borrow more money just to pay the balance of that year’s interest bill.

    At one level, it is easy to think that the Government could have “saved” more in the Howard/Costello years, but even if they had managed to stash away several hundred billion, it would have been blown by Rudd/Gillard/Rudd. The stimulus cheques would have been larger and more frequent, the entire all singing, all dancing NBN would have been funded up front, and we would have had at least one other fabulous “nation building” wet dream such as east coast high speed rail.

    If I have a criticism of Howard and Costello, it is what they did to raise expectations – they were just a bit too clever at letting people think that windfalls due to dumb luck were an earned entitlement which was going to roll on forever. That is why I took some heart at Hockey’s “end of the age of entitlement” speech (seems an age ago, now), but subsequent actions have fallen far short of those hopes both in terms of substance, and the skill and consistency with which they have been pursued.

  25. Andrew

    Good speech by the NSW finance minister on Quadrant – https://quadrant.org.au/opinion/qed/2015/04/peoples-money-runs/

    When he walks the walk rather than talks I’ll believe that he believes it.

    Perrottet is from the hard-right in NSW, very solid on both economic and social issues.

  26. Squirrel

    “Cats: can anyone explain to me the big emphasis on the iron ore price driving budget outcomes apart from the obvious political spin line that: well, we can’t control iron ore prices, so we will have to write $30 billion off the forward estimates. I see the link with company tax, but that is not that large, so what is the rest of the impact?)”

    The fact that it is, apparently, $30bn over a four year period – a crucial detail which would be lost on the vast majority of people who even hear or read that figure – probably answers the question.

    The concept of forward estimates obviously has (or should have) a valuable role in the budgetary process, but forward estimates totals are, these days, almost invariably used in public debate and discussion to create the impression that the figure quoted is annual – thus grossly exaggerating spending and savings initiatives in the public mind (for very obvious political purposes).

    By way of further support for this theory about the big emphasis on iron ore prices, Hockey’s retort that he would love to have the (claimed) $25bn extra revenue that Costello would have had, glossed over the point that even with that, Hockey would still (absent miracles or major sleight of hand on 12 May) still be presenting a deficit Budget.

  27. Ralph

    If I have a criticism of Howard and Costello, it is what they did to raise expectations – they were just a bit too clever at letting people think that windfalls due to dumb luck were an earned entitlement which was going to roll on forever.

    Exactly right. The iron ore price was not huge in those days, but it was increasing quickly off a low base. Actual revenue exceeded projections by some distance every year, giving Howard & Costello the ability to provide tax cuts (good) and introduce middle class welfare and transfer payments (looks a bit indulgent now). They also left money in the bank.
    There’s no doubt that Howard & Costello benefited from good economic conditions to enable to them to do what they did. Ironically, it all looked so easy that the public thought the economy was on auto-pilot and that any monkey could do it. That’s what gave the voters the confidence that they could make the switch to Rudd. We’ll never know of course, but things would probably have continued more or less in the same way had it not been for the GFC.
    Now, of course, we’re in the reverse situation. Whoever was in power at the time of the GFC was going to blow the surplus to some extent. Now we’ve got falling commodity prices and we’re chasing our tails in a downward spiral. All sides of politics have contributed to this. Labor didn’t do enough to reign things in, so we elected the Coalition to finish the job. But now they’re squibbing it too.

  28. Maurer

    Assuming the Financial Account is fixed, there can be no change in the Current Account. Any fall in export earnings arising from a drop in the iron ore price being fully offset by any devaluation and the resulting increase in net exports. In other words, net exports would not change since given a shift in the volume of iron ore sold or via a shift in other goods and services which may benefit from the change in comparative advantage flowing from the devaluation.
    No change in net exports will mean that the only difference to Commonwealth tax receipts will be the difference between relative tax rates attributable to the factors of production. If iron ore is sold above its cost of production, the tax foregone will be equal to the tax on capital at 30%. However, this will be replaced by taxes on other goods and services, either tax on capital at 30% or at the applicable marginal tax rate for labour.
    As a result, we may expect a shift in the Commonwealth tax take but it is difficult to see which way this would go, or indeed, that the change would be all that significant.
    Therefore, it is difficult to see that the iron ore price should make all that much of difference to the overall tax take.

  29. woolfe

    (Cats: can anyone explain to me the big emphasis on the iron ore price driving budget outcomes apart from the obvious political spin line that: well, we can’t control iron ore prices, so we will have to write $30 billion off the forward estimates. I see the link with company tax, but that is not that large, so what is the rest of the impact?)

    A lot of jobs, probably in the thousands have been lost, most were high paying.

  30. Fibro

    Judith: (Cats: can anyone explain to me the big emphasis on the iron ore price driving budget outcomes apart from the obvious political spin line that: well, we can’t control iron ore prices, so we will have to write $30 billion off the forward estimates. I see the link with company tax, but that is not that large, so what is the rest of the impact?)

    Thanks for raising this in the post Judith, a point I rasied in Siclairs article How is that iron ore price looking? the other day. The cat crew are very smart cookies and looks like repsonses so far is noone actually knows, confirming my suspicion that this is just smoke and mirrors. I have written to Joe’s electorate email asking for an explanation, and I will be interested to hear the response in the fullness of time. Not.

    Time for a journo to call it out to Tony or Joe next time they utter the words and see what happens. If no answer from Joe’s office, maybe I should ask the Guardian instead.

  31. Mr Rusty

    Anyone know how much did the 6 years of RGR receive from the mining boom vs the 14 years of Howard / Costello?

  32. Fred Lenin

    It is the aim of the next Shorten green/ alp/ communist / uion mafia guvmint ,will enlist the services of Woin Swonn ( paid of course) to balance the budget and create surpluses,to bring us into line with Somalia and Sudan ,here many of our valued migrants ,who ar well known to the Police and Courts ,come from. Two million unscreened muslim migrants will be brought in to go on welfare and vote liars pardee . To make them feel at home all food will have to be halal and sharia law introduced enfoced by muslim mlitia
    A vote for Liebor is a vote for Alah !

  33. Neil

    Anyone know how much did the 6 years of RGR receive from the mining boom vs the 14 years of Howard / Costello?

    The question is false. The mining boom did not start until 2004. So Costello only got the benefit from 2004-2007. Just 3 years.

    The boom exploded in 2008. Nothing like it in Australian history and RGR wasted the lot.

    http://www.rba.gov.au/statistics/frequency/commodity-prices/2015/icp-0315.html

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