Since this is the week that we get to see the Intergenerational Report, I am delighted to report to you that I have devised, pro bono, an absolutely pain-free policy reform proposal that will halve the projected national debt burden by 2065.

The scheme is not a complicated one, but no less brilliant for its elegant simplicity (if I do say so myself, and I do). It goes as follows: we simply double the length of the year. New Year’s will now come around every 24 months, or about every 730 days. Not only will we save on birthday presents, which we will exchange exactly half as often, it will have the effect of reducing the debt-to-GDP ratio in 2065 from the 100% forecast in the report to a more manageable 50%.

The implications of this are, as I’m sure you would concur, enormous. After all, The Daily Telegraph reported on the weekend that by 2065 “net debt will swallow the economy”, since it will be equal to “the entire Australian economy”. (This in a front-page article graced with the unimprovable headline “Debt bomb to swallow us all” — the bomb that digests people before it explodes was I think rejected by Albert R. Broccoli and Harry Saltzman as a premise for a Roger Moore-era Bond plot.)

If you are going to be dead by then, you might still have reason to worry: the report says that federal debt will “represent half the nation’s entire economy within two decades unless tough action is taken”. The author of the article, Samantha Maiden, for some reason thinks this action will require a departure from “Labor’s current budget settings”; as it turns out I have been labouring under a delusion that Her Majesty’s Australian Government was largely composed of Liberal and National members.

So how will my year-enhancement scheme reduce debt to 50% of the “entire Australian economy” by 2065? Well, we usually measure the size of the economy in gross domestic product. GDP is the value of all final goods and services produced within the borders of Australia over 365.242 days, a period of time to which some antique sage gave the name of “year”. But when we double the length of the year by legislative fiat, GDP will suddenly become the value of all final goods and services produced over the period of 730.484 days, having as an agreeable concomitant that we will be instantly doubling the size of the “entire Australian economy”.

Which means when we compare it with a plain old number, like the stock of net debt, the pile of government bonds will look exactly half the size it used to, relatively speaking.

Of course, we haven’t reduced the actual amount of debt at all. Computing a debt-to-GDP ratio requires measuring two things: GDP is a number measured over a period of time (we call that a “flow”) while debt is just a number (we call that a “stock”).

Think of it like the difference between the total amount of food in your fridge and the amount of food you eat each day. A consumption-to-fridge ratio of 100% might be worrying if you’re calculating the amount of food you eat every day, but it would be pretty uneventful if consumption were measured over a week, and possibly a cause for alarm if instead you were using your yearly food consumption.

Thus a country’s debt-to-GDP ratio, if you really want to know, is the answer to the question, “At this level of debt and with this level of yearly output, how many years would it take for us to repay all of our debt if we devoted all of our economic output to extinguishing it?” A ratio of 15%, which Maiden gives as the current figure, simply means it would take 15% of a year’s worth — or about 55 days’ worth — of national economic output to bring net debt down to zero.

The ratio, while a little complicated in the interpretation, is a good way of comparing debt between countries. It also makes it easy to compare debt levels in the same country over time.

But the actual number doesn’t really mean a whole lot, at least by itself. Without more information, there’s really no reason to think one way or another that a debt that is bigger or smaller than one year’s worth of economic output is either too much debt or not enough. And so, with all due respect to Sam Maiden, there’s nothing especially magical about a debt-to-GDP ratio of 50% or 100%: if Australia’s net federal debt crosses either of those thresholds, it will be quite literally an artefact of Johannes Kepler’s Third Law of Planetary Motion.

Now, where do I collect my knighthood?

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW