By looking to increase Australia’s debt ceiling by $100 billion, Joe Hockey is not pursuing the kind of budget restraint he promised during the election. It needn’t be that way.
While the United States has at least temporarily increased its ceiling on the amount of debt the government can accumulate, one of the first things the Abbott government will do when Parliament resumes next month, after introducing legislation to repeal the carbon tax, will be to increase the Australian government’s debt ceiling.
The current ceiling in Australia is $300 billion, which is less than 20% of gross domestic product. By way of comparison, the US debt ceiling is around 105% of GDP. People with knowledge on this issue realise that Australia’s gross government debt is tiny, and in fact is so small that Australia has had to get special dispensation from several of the post-global crisis new international banking regulations. These include the Basel III requirements for bank assets and capitalisation because there simply aren’t enough Australian government bonds on issue for the banks and others to hold.
That issue aside, Australia’s gross debt will continue to increase, given the budget is in deficit for a few more years and the money to cover that debt needs to be borrowed to make sure the government meets its financial obligations. It is as simple as that. In the US, we just saw a glimpse of the kind of problems that can be incurred when a debt ceiling is not raised.
According to some media reports, Treasurer Joe Hockey wants to increase our debt ceiling by a third, from $300 billion to $400 billion. While judging what limit to use is always open to debate, Hockey is erring on the side of having some leeway given the published Treasury projections have gross debt peaking at $370 billion over the next four years. It seems Hockey wants to make the ceiling so high that he covers for the risk of loose fiscal policy — or at least so he will not have to revisit the issue during this term.
For gross debt to hit the $400 billion level, the budget deficit position would have to get worse than the position presented under the Labor government’s policies, which were summed up in the Pre-Election Fiscal and Economic Outlook document.
To be sure, the limit has to take account of within-year variations in the budget balance — revenue and spending patterns for the government are very lumpy, as are maturing bonds, so some wriggle room is essential. But by looking to increase the ceiling so dramatically, Hockey is not imposing the kind of fiscal disciple he was advocating when in opposition.
It needn’t be that way for Hockey. He could, if he saw fit, fast-track some spending cuts or tax increases, including them in an economic statement or mini-budget before year end. Some six weeks after the election and there is no sign of that. Indeed, there have not been any policies from the new government aimed at changing the budget bottom line.
An early cut in an entitlement here, a tax hike there, and Hockey could be knocking off a few billion dollars a year on the size of government and therefore the required lift in the debt ceiling. Maybe he is secretly working on such a plan, but for now, he seems content to let the fiscal policy settings run on the same trajectory as those left by Labor.
For Labor and the Greens, when the legislation to increase the government debt ceiling goes to the Senate, presumably next month, they should pass it without question. The debt ceiling is a functioning-of-government issue, not a policy matter. We have just seen the consequences of tomfoolery as the unhinged Republicans in the US House of Representatives delayed a vote to shore up the economy so they could secure concessions on other legislation. Let’s hope Labor sides with the government and lets the debt ceiling increase go through the Senate.
Many were (rightly) very critical of Hockey earlier this year, when in opposition he left open the possibility of the Coalition blocking Labor’s plan to lift the debt ceiling. It was misguided then and it would be misguided now.
In the end, it probably matters little whether the debt ceiling is raised to $350 billion or $400 billion. Australia’s government debt is very low. What is important is that no party stops the raising of the debt ceiling so the government can function, and that the driver of the debt — namely the budget balance — remains on a trajectory that, firstly, is alert to the growth-rate in the economy, and secondly, holds to a balanced budget over the course of the business cycle.