Thursday, November 27, 2008

Who ran up and who paid off debt

Commenter Marek asked whether Julie Bishop could possibly be right when she said that it took the Coalition ten years to pay off $96 billion of debt left by Labor.

The figures are here, and below - click to enlarge.

Julie Bishop is right. The Coalition paid off Labor's debt. It did it by selling just about everything it could lay its hands on apart from Australia Post.

Telstra accounted for the bulk of it (although the government got a bad price for the first lot of Telstra).

Selling Telstra meant that the government missed out on its dividends. It helped government finances not at all.

It was as if a farm sold it cows to pay off its debt. It would become debt-free, but would miss out on milk and the earnings from selling it.


"Grendel" said...

Peter, not only that but the way they sold off Telstra denied the Howard Government of the influence over Telstra that they badly needed later on. It also denied this influence to all successive governments and was a betrayal of the Australian taxpayer.

Selling off the copper wire has had ongoing consequences.

Marek said...

Thanks Peter. I was wondering why i didn't notice 10 budget with a surplus of 10 bil each

Also, why are we still paying interest in 2005 when we have no debt?

Peter Martin said...

Hi Marek,

We're not paying (net) interest anymore. The number for this financial year has a minus sign in front of it!

Scotty said...

Peter, you say that paying off that debt did not help our government finances at all. I wonder then: what do you think of the reduction of net interest payments from around 1 per cent of GDP most years during the hawke/keating years, to the government being paid interest now? I would like to compare that to the size of the dividends paid by these assets when they were in government ownership.

Marek said...


I was referring to 2005-06 where we had -5337 in debt and yet paid 2265 in interest?

Peter Martin said...

Good question

Peter Martin said...

Dear Scotty,

I'd like to know that too - except that's what's relevant is the size of the dividends that would be being paid now had those assets remained in government ownership.

Actually that's only some of what's relevant. What matters is the profits those organisations would be making - a larger figure. Whether those profits are retained or paid out as dividends is beside the point.

To see this, imagine that that the firm paid out all of its profits to the government as dividends which then invested the money. Now imagine that the firm paid out none of its profits as dividends but instead invested the money (in itself).

The effect would have been the same - the governments worth (earning ability) would have increased by the same amount.

So what matters is whether Telstra's profits now are worth more than the interest that would have to be paid now.

John Quiggin has views about this and writes about it well:

In the case of buildings sold, what would be relevant is whether the rent that now has to be paid is larger than the interest that now does not have to be paid

Marek said...

Well telstra will be making about 4 bil this year @5% interest that means we should have got 80 bil for it. And you really should (as Grendel mentioned)add a control premium +20% = $96 bil. Telstra has a market cap of about 50b at the moment - bargin!

Let me know if my maths(and logic) is correct!

Peter Martin said...

Quiggin writes about this more technically here:

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