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.