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Feb 3, 2015

Remember Labor's 'skyrocketing debt'? The Coalition's is much worse

The "grown-ups" of the Abbott government were big on rhetoric but not so big on delivery when it came to reducing the debt. Freelance journalist Alan Austin runs the numbers.

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Figures released Friday night on Australia’s finances are grim reading for anyone seeking respite for the embattled Abbott government.

The Coalition that promised in 2012 to reduce Australia’s debt by $30 billion delivered in 2014 an increase of more than $60 billion. Clearly Prime Minister Tony Abbott and Treasurer Joe Hockey have failed spectacularly to reduce Labor’s “skyrocketing debt”.

Outcomes for the full calendar year 2014 are now online at the Finance Department’s website. Commonwealth monthly financial statements show year-to-date net debt and the projection for the full financial year. Hence it is simple to calculate the debt incurred — or repaid — each month.

Australia’s net government debt — that is, money borrowed minus money loaned out — was $239.16 billion at the end of December. This was a hefty increase over the level a month earlier of $224.35 billion. In just one month, the debt rose almost $15 billion, or 6.6%. Compounded, that rate would double the debt in less than a year. Fortunately, the December rise was abnormal.

So what was the full-year increase through 2014?

At the end of 2013, the actual net debt was $177.74 billion. Hence the increase over the full year was $61.42 billion ($239.16 – $177.74). That’s a rise of 34.6%.

That December 2013 actual figure is pretty close to the level that can reasonably be attributed to Labor. As Crikey explained last October, the best measure of Labor’s debt is the projection for the end of the full year 2013-14 at the September 2013 election. At that time, projected debt at year end was $178.1 billion, although actual debt then was marginally lower. That year-end projection of $178.1 billion was affirmed in Finance’s statements for October and November 2013. It did not shift until well after Joe Hockey had taken control of the levers.

So is it possible that debt has peaked and will soon tumble, as promised? No — Friday’s figures also show a higher estimate for total debt at year end, still six months away. This is now projected to be $244.84 billion.

If $178.1 billion is the debt level attributable to Labor, then it can be argued that by the end of this financial year the Coalition will have blown out Labor’s debt by $66.7 billion ($244.8 billion to $178.1 billion) or 37.5%. In one budget.

This gets extremely uncomfortable for Abbott, Hockey and their backers when pre-election promises are recalled. Abbott told the Victorian Employers Chamber of Commerce and Industry just a year before the election that the Coalition had “identified $50 billion of savings, for an $11 billion improvement in the budget bottom line and a reduction of $30 billion in net debt”.

Had that claim been realistic, the projection for this year would be $148.1 billion ($178.1 billion minus $30 billion), instead of $244.84 billion (assuming the debt reduction could be effected in the first full year, which might not have been the intention).

Of course, this debt increase is not of any immediate economic concern. A case can be made that Australia’s borrowings in recent years have been much too low given negative real interest rates and the need for investments in productive infrastructure.

Australia’s net debt is only about 15% of its gross domestic product, even with the recent surge under the Coalition. That is well below levels in Switzerland, Canada, Germany and the UK — all of which have triple-A credit ratings and no problem.

Where burgeoning borrowings will impact taxpayers is in the interest payable. Before the election, Abbott told the Economic and Social Outlook Conference in Melbourne that the Gillard government was “spending about $20 million a day just to pay the interest on what it has already borrowed”.

The bill now? Friday’s report shows interest paid in December was $1.217 billion for the month, which is $39.3 million per day.

How likely, then, are continuing debt blow-outs and further interest increases?

Friday’s Finance report reveals that the deficit in the underlying cash balance in December was $98 million worse than estimated in the Mid-Year Economic and Fiscal Outlook, released only last month. It attributes this to “higher than expected cash payments”.

The December fiscal balance was also worse than predicted just a month ago by $765 million. This, the report said, “is largely due to lower than expected revenue”.

If declining revenues and increasing outlays continue, greater debt must be the result. With the government now under unprecedented pressure, can Hockey effect the drastic measures needed to turn this around?

If he can, he deserves a knighthood.

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26 comments

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26 thoughts on “Remember Labor’s ‘skyrocketing debt’? The Coalition’s is much worse

  1. alan austin

    Hi again Peter,

    The clarity of the position that debt is not too high may be judged here:

    “Of course, this debt increase is not of any immediate economic concern. A case can be made that Australia’s borrowings in recent years have been much too low given negative real interest rates and the need for investments in productive infrastructure.”

    Which was followed by this to enhance further its crystalline quality:

    “Australia’s net debt is only about 15% of its gross domestic product, even with the recent surge under the Coalition. That is well below levels in Switzerland, Canada, Germany and the UK — all of which have triple-A credit ratings and no problem.”

    Re, “The tone of the article is that the Abbott and Hockey led government is incompetent because they haven’t been able to do what they said they would.”

    Precisely. That was the one and only purpose of the piece. It did not endeavour to discuss fiscal policy beyond that.

    I pretty much agree with your observations on spending and revenue, Peter, but that is way beyond the limited scope of this humble piece.

    Yes, I am engaging with Bill Mitchell on his blog. I still think he misread the piece and overreacted. We shall soon see where that discussion concludes.

    Thanks again, Peter.
    Cheers,
    Alan A

  2. Peter Martin

    Alan,

    In Opposition, the Coalition made it abundantly clear: low debt good; high debt bad. Correct?

    They made it abundantly clear that they thought that sure. And, of course the temptation, politically, is to taunt them for being unable to do what they promised. I exchanged a couple of emails with Denis Skinner in the UK, BTW, who was doing exactly the same thing with the UK Coalition.

    It’s nice to see them squirm, but ultimately it’s counterproductive. The public get the idea that even more austerity is needed to fix things.

    As is made crystal clear in the text of this piece ??

    I don’t think the clarity was quite what I’d expect in a crystal. The tone of the article is that the Abbott and Hockey led government is incompetent because they haven’t been able to do what they said they would. Whereas the reality is they are incompetent for ever thinking that that deficit reduction, to the extent of promising a surplus, was a good idea anyway.

    The further reality is that trying to cut deficits by cutting spending and raising taxes doesn’t work anyway. Cutting spending reduces the money available in the economy for taxation. Raising taxes doesn’t increase taxation revenue in the simple minded way many politicians think it should. Deficits often end up higher than before, as economic activity decreases.

    If you can think of a way of expressing that message with crystal clarity -good luck! I’ll give you a hand if you need it and I dare say Bill will too.

  3. John Hermann

    More important than quibbling about precisely what was meant by expressions both in and out of quotes, is the necessity to highlight – for the benefit of the average person in the street -the economic illiteracy of most of the federal government frontbench, and their unwillingness or inability to listen to advice from people who understand more than they do. There can be no doubt that the demonstrable incompetence and intransigence of both the Treasurer and Finance Minister is doing great damage to the Australian economy in current circumstances. Their insistence that their ultimate objective remains a series of budget surpluses despite the historical evidence that attempts to do so always result in recession being a case in point.

  4. Honest Johnny

    alan, I certainly agree with your article. When politicians contradict themselves for political reasons, they are obviously hoping they will not be caught out or are treating us with contempt. It behoves all good journalists to expose hypocrisy for what it is no matter which side. Joe Hockey said yesterday “a cut to interest rates is good news for business and households”, whereas, as Peter Martin pointed out in The Age, in opposition when the Reserve Bank cut rates, he said “it was a sign the economy was struggling”.

  5. alan austin

    Thanks Peter.
    If you read the first two sentences you will see this piece is assessing progress of the current Government on debt according to its criteria for success.
    In Opposition, the Coalition made it abundantly clear: low debt good; high debt bad.
    Correct?
    As is made crystal clear in the text of this piece, Crikey does not subscribe to that. Australia does not have a debt problem with net debt below 15% of GDP. Neither does the UK with net debt above 90%.
    According to the values of the current Coalition Government, however, a blow-out of the debt by $61 billion is most certainly “worse” – as highlighted in the headline. Terribly worse, in fact, after promising to reduce the debt by $30 billion.
    So is the increase in just the last month in the underlying cash balance deficit of $98 million “worse” according to oft-expressed Coalition values.
    And so is the December fiscal balance deficit higher than predicted just a month ago by $765 million.
    Okay, Mr Hockey and Senator Cormann may not say they are “worse”. But you know they are thinking it.

  6. Peter Martin

    Alan Austin,

    “The value laden terms in this piece are all in quotes attributed to others”

    You may think that but they aren’t. The first value laden term that isn’t in quotes is “much worse” in the title. Having started you off maybe you’d like to go through the article and count up all the rest!

    You should invite Bill to write for Crikey himself. He’d be sure to generate a few heated discussions!

  7. alan austin

    Thanks for this discussion.
    @ Are you free, re #15, agree entirely that pejorative terms should not be used. The article uses increase, hefty increase, blow-out, rise, shift, double as quantitative only, not qualitative. It assiduously avoids terms such as deterioration, disaster, danger, emergency, fiscal hole, debt mess – all used continually by economics writers between November 2007 and September 2013.
    The value laden terms in this piece are all in quotes attributed to others.
    Agree with both your posts, Dog’s breakfast. Well said.
    Thanks for that alert, Supermundane.
    Have responded to Bill Mitchell on his blog (easily googled) and look forward to a constructive chat.
    Both he and Are you free appear to have misread the piece, above.
    We shall see.

  8. John Hermann

    “The household budget is a useful analogy only up to a point.”

    There is no analogy whatsoever between the Commonwealth budget and a household budget. They operate according to quite different principles, as any student taking macroeconomics 101 will inform you. A household can go broke, but a sovereign currency-issuing government can NEVER go broke, and it can service whatever level of public debt it has on its books without needing to worry about high interest rates or inflation.

  9. supermundane

    @Alan Austin.

    Australian economist Bill Mitchell has weighed in with a response to your article and for the reasons outlined by ‘Are you free?’ he’s not terribly impressed with your efforts. Since posting links here leads to an comment being consigned to purgatory I suggest searching for Bill Mitchell’s blog with today’s article ‘Crikey, why is it is honourable to deliberately increase unemployment?’

  10. Dogs breakfast

    All of the low hanging fruit for revenue falls on the side of those making plenty of money, or avoidning tax, which one can confidently say is the wealthier members of society.

    The Tobin Tax, getting rid of negative gearing, superannuation concessions that fall heavily to high income earners, capital gains tax concessions.

    If only we had a government with the courage to work on fairness in the tax system rather than trying to squeeze the last dollar out of the unemployed and uni students.

  11. Dogs breakfast

    Hold on a second. Does this mean that Joe Hockey’s simple solutions to complex problems don’t work?

    You know, the months and years he excoriated Labor during dropping revenue era and blamed it all on Labor spending. Does this mean he may have been indulging in blather to fool a compliant and dull electorate??????

    Say it ain’t so, Joe.

  12. Are you free?

    @13
    Thank you for the reply.

    “It is probably necessary that this and other progressive publications use some terminology deployed by the IPA and Coalition MPs. That seems unavoidable.”
    You never need use pejorative terms like “blown out”, “burgeoning” or “worse” – that is singing from the neoliberals’ hymn sheet.

    “The household budget is a useful analogy only up to a point.”
    No, it’s never useful. The electors are walking round out there believing, wrongly, that the Australian Government faces a solvency constraint. The truth is that the government is the monopoly issuer of its own fiat currency. Taxes don’t fund a damn thing and it never needs private debt markets! See how the facts transform the situation?

  13. AR

    JO’N – off hand I cannot think of an idea more guaranteed to terrorise the paper shufflers of the stock market than the Tobin tax. Bring it ON!

  14. alan austin

    Yes and no, Are you free?
    It is probably necessary that this and other progressive publications use some terminology deployed by the IPA and Coalition MPs. That seems unavoidable.
    But that does not mean we accept their narrative. Pretty sure we do not.
    The household budget is a useful analogy only up to a point. And Senator Joyce does push it way too far.
    In what way do you think those three quotes are problematic?
    Happy to clarify. Happy to discuss.

  15. James O'Neill

    Harry Smith @ #10. Bi-parftisan support does not make it good policy. Both the major parties are lapdogs of the US on foreign policy issues anyway. There needs to be an honest debate, as Malcolm Fraser has tried to stimulate.

    Alan @ #9. I know the GST is regressive, which is why I suggested a major revamp of the tax paid at low income levels. You might usefully look at the NZ experience. A 15% rate applied universally with no tax at lower income levels. They are running a budget surplus, have good growth rates, a much more progressive social policy platform than Australia, and don’t waste vast sums in other people’s wars.

  16. Are you free?

    “…by the end of this financial year the Coalition will have blown out Labor’s debt…”
    “Where burgeoning borrowings will impact taxpayers is in the interest payable.”
    “The December fiscal balance was also worse…”

    Alan, it frustrates me that a publication that positions itself as progressive and for an educated audience would rehash the neoliberal shibboleths of the IPA. I was very unimpressed that neither Mr Swan nor Senator Waters skewered Mr Joyce for his repetition of the false household budget-federal budget analogy on Q&A. Without telling the truth about how our monetary system works, Swan will never be able to properly defend the absolutely correct stimulus action taken by the Rudd Government.

  17. Harry Smith

    Haha if you think you’re going to get “the facts” here free from hyperbole, you’re dreaming.

    The JSF program has bi-partisan support. The purchase was even acknowledged as being worthwhile by independent think-tanks.

    Several billion dollars are held up in the budget stalemate. To pull the deficit figure out and blame Abbott is not acknowledging the full position.

    PS, the ad blitz wouldn’t be necessary if it wasn’t for the exaggerated scaremongering about deregulation that constantly erupts from the apparatchiks.

  18. alan austin

    Intriguing comments. Thank you.
    James O, meeting the revenue shortfall could be just a simple matter of getting high income earners to pay their fair share. That should be simple, shouldn’t it?
    Several of your tax suggestions certainly have merit. Maybe not increasing the regressive GST, though.
    Harry S, when you say “the spending that were supported by that tax [carbon tax] were blocked by Labor, Greens, and Palmer”, can you point to a Coalition policy now blocked in the Senate which was not ruled out before the last election?
    Thanks, Harry.
    Happy to discuss. AA

  19. Honest Johnny

    Fooled by the left eh? As an economist and accountant in Public Practice, I don’t listen to hyperbole and rhetoric, I look for the facts (that’s why I read Crikey). Hockey, himself stated the repeal of the mining tax was a $6.5 billion hit to budget bottom line but was ‘damn good deal’ for Australians, all the associated measures that aided small business were also repealed except the school kids bonus, and in an unfair hit to retirees, the super guarantee increases were pushed back to 2021. It’s now estimated the repeal of the carbon tax will take $6.931 billion out of the budget in net fiscal terms (this comes from Hansard). On top of this $12 billion will be spent on 58 more next-generation F-35s, including 1.5 billion on a facility at Williamtown. Also the Government gave an unnecessary 8.8 billion one-off grant to the Reserve Bank. Then you’ve got the waste, (Abbott said he would stop the waste) too much to mention here but lets start with a $20 million ad blitz for scholarships not yet approved? That’s at least $35 billion the Abbott Government has added to the debt and you’re blaming it on a Labor and the Green’s “scorched earth Exit”? Please Harry, stick to the facts.

  20. Brightside

    So Harry, on your reasoning, structural deficits resulting form ‘middle class welfare’ dolled out during a temporary resources boom can be lay fairly at the feet of the Howard government? In any case, argument over history is a moot point. the real issues is the lack of viable policy ideas, to fix the revenue/budget problem, that are acceptable to the majority.

  21. Harry Smith

    “Unfair” cuts to welfare, health and education? Well, what you may call unfair, frankly, others won’t.

    Palmer has no problem with high debt levels just like labor. The revenue streams (eg carbon tax) that the public opposed were rid of, but the spending that were supported by that tax were blocked by Labor, Greens, and Palmer.

    At the end of the day, this article aims to place blame on the incumbent, when they are actually dealing with ALP’s scorched earth exit from government (long, locked in committments), and a hostile senate. So you can’t blame the Libs for that.

    Honest Jonny, you are being fooled by the Left.

  22. westral

    Thankfully we have been delivered from the years of Labor chaos and now have responsible people in charge of the government of this great country. If the debt has increased under the coalition it is because Labor has been so intransigent as to oppose the government’s entirely reasonable programs which have created a higher class of chaos than Labor could ever aspire to. The pity is that most of Australia does not realise who to thank for this, it is in fact that great captain toxic Tony, long may he rule to create knights and dames in plenty.

  23. Honest Johnny

    No Harry, its actually got more to do with the big ticket spending items of the Abbott Govt as well as the removal of effective revenue streams all approved by the Senate with the help of Palmer. What is being blocked in the Senate are unfair cuts to welfare, health and education, all spending cut items, minor in comparison to what the Senate has put through. Don’t be fooled by Abbott/Hockey rhetoric, seek out the truth.

  24. Harry Smith

    Ummm might it have anything to do with the Labor and Greens blocking it in the Senate?

    So the actions of Labor are still racking up debt.

    See it for what it is. Labor causing more debt.

  25. James O'Neill

    Alan, it is no wonder that the figures were released on a Friday night. I think that what is needed is a genuinely radical reappraisal of the revenue side of the equation. That would include but not be limited to removing tax breaks for multinationals; the feasibility of a Tobin tax; making GST both universal and at a high rate (with compensatory tax breaks for low income people) and the dismantling of Howard’s middle class welfare largesse. On the expenditure side an equally radical reappraisal is needed, not in cutting the welfare bill which is the favoured Tory approach, but asking hard questions about “defence” expenditure. The F35 boondoggle is but one area where billions have been and will be wasted for no obvious strategic purpose.

  26. Honest Johnny

    Blame it on the “opportunists” Labor. Blame it on the “economic vandals” Greens. Blame it on the “recalcitrant” Senate. Didn’t Abbott say that putting the adults back in charge would mean an end to the blame game?

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