Friday, February 06, 2009

REALITY CHECK: "It's the children I'm thinking about"

"Ten little toes from Mum and Dad... $9,500 debt from Kevin Rudd"

-- Liberal Party YouTube advertisement, using a photo of a baby's toes to argue that Kevin Rudd plans to lump every Australian with $9,500 in debt.

IT'S NOTHING like $9,500 as things stand. Kevin Rudd is planning to spend $42 billion over two years, not the $200 billion needed justify the Liberal Party's calculation. But the bills before the Senate do allow his government to borrow up to $200 billion if needed. It's like a credit limit. It's not a debt unless you use it.

And the government has undertaken to pay back the debt as the economy recovers. In its words, it will "bank any increase in tax receipts associated with economic recovery".

But even if it didn't, a few thousand dollars would hardly a burden for our children.

The Treasury's 2007 Intergenerational Report expects real GDP per person to grow by an average an average of 1.6 per cent per year for each of the next 40 years. The magic of compound growth means that by then each of our children would be producing almost twice as much as we do now, and most probably earning almost twice as much as well.

It would become far easier for our children to pay off that debt than it is for us right now, in the same way as right now each of us find it easier to pay off our debts as our real income rises.

And in any case the Opposition is also planning to run up debts...

Its plan to bring forward to January the tax cuts legislated for this July and next July would cost $11 billion.

The exact amount of debt that would be run up is under the control of neither side of politics.

It depends on the economy. The worse it gets the bigger the government's debt gets (or the smaller its savings get), automatically. Every time an Australian loses a job, for example, the governments tax income falls and its spending on benefits climbs.

As the economy picks up and Australians get jobs back, the process unwinds, also automatically.

The Opposition's planned early tax cuts are smaller than the government's planned bonus payments, but not that different in other respects.

The Opposition leader decries the "sugar hit" inherent in upfront stimulus cheques, but his own proposal to bring forward the legislated tax cuts to January would itself produce a sugar hit. The first adjusted pay packets, accounting for several months of backdated income tax cuts, would be pretty hefty.

But it wouldn't be a permanent drain on the Budget as the Treasurer Wayne Swan says it would. The tax cuts were coming any way.