Friday, September 25, 2009

The Coalition Debt Truck: Running on empty

The Coalition's campaign against government debt has been unfortunate on many levels. Now its figures are wrong:

Australia's government debt is set to top out at just $108 billion rather than $200 billion and more used the Coalition to justify its claim that the Rudd government plans to "lump every Australian with $9500 in debt".

The updated estimate from Westpac - a near halving - reflects a much stronger than expected economy and comes as an official Reserve Bank survey finds that Australian banks ramped up their interest earnings 22 per cent during the global crisis and that Australian businesses succeeded in raising more money from the share market than at any time since the 1980s.

The Reserve Bank's Financial Stability Review finds conditions have "improved significantly" and that its time for banks to wean themselves off $142 billion in government borrowing guarantees.

Westpac finds that this year's underlying cash budget deficit is likely to be $49 billion rather than the $58 billion forecast at budget time and that next year's should be $35 billion, far less than the budget forecast of $57 billion...

As well the government is likely to have banked an extra $5 billion at the end of the last financial year as a result of higher than expected tax receipts and also lower than expected grant payments. Grant payments alone have been running $6.5 billion below forecasts, causing Westpac to caution that its estimates may prove pessimistic.

"The effect on government debt will be cumulative," said Westpac senior economist Andrew Hanlan. "We're forecasting a peak of $108 billion in 2012/13 rather than the $188 billion forecast in the budget. The $80 billion improvement is simply the sum of the improved budget positions over those years."

The Coalition used a bigger figure of $200 billion in its advertising in May and in July boosted it to $315 billion on its so-called debt truck, a figure Opposition Leader Malcolm Turnbull said was "over 13,000 of debt for every man, every woman and every child in Australia".

The government will officially update the budget forecasts in December. Mr Hanlan said Westpac's projections were prepared on the basis of "no policy changes" over the next three years, meaning that any new spending promised during the next election would add to the debt estimate.

The revised Westpac forecast takes some of the heat out of Monday's Senate hearing set up to quiz Reserve Bank Governor Glenn Stevens and Treasury Secretary Ken Henry on the "efficacy and anticipated costs and benefits" of their stimulus measures.

Other figures released yesterday point to an avalanche of new home sales in August ahead of the phasing out of the $21,000 First Home Owners Boost for new buyers buying newly built homes. National new home sales jumped 11 per cent in August as did NSW sales - the biggest jump in three years - with Victorian sales up a staggering 22 per cent, believed to be the biggest jump on record.

In an indication of the potency of the boost the Reserve Bank report found that first home buyers have been paying more for their homes than other buyers; "an unusual outcome by historical standards".

The Bank found that private banks managed to widen their interest margins during the financial crisis, driving up their net interest income 22 per cnet over the year. Businesses raised double the usual amount of equity in the first half of this year and households enjoyed a 4 per cent lift in disposable income despite working fewer hours, as a result of tax cuts and stimulus payments.

Published in today's Age

UPDATE: The Coalition has told me where its $200 billion, later replaced with $315 billion debt figure came from.

They were both mentioned by Swan in Hansard on 25 May, the first for net debt, the second for Gross debt. The Coalition used the $200 billion net figure in its advertising at first, and then switched to using the $315 billion gross figure. Mmmm...

Westpac Budget Update


Letters to Editor, Age said...

Letter to Editor, September 26, 2009

I refer to the article by Peter Martin in the Age of September 25 2009. In this article he refers to government debt figures which he claims are “used” by the Coalition. There is an implication, though not an assertion, that these figures are a creation of the Coalition. I would like to make it clear that these are the government's numbers - not an invention of the Coalition - as quoted by the Prime Minister and Treasurer in Parliament on Monday 25 May where they stated that the government’s forecast net peak debt of $200bn and gross peak debt of $315bn.

The Hon Joe Hockey
Shadow Treasurer

rog said...

What exactly does "Mmmm" signify Peter?

We all understand the difference between nett and gross, much like we understand the difference between retail and wholesale.

We also understand, from your commentary, that the govt is paying (via taxpayers) for the economy to continue as it was prior to the GFC.

"In an indication of the potency of the boost the Reserve Bank report found that first home buyers have been paying more for their homes than other buyers; "an unusual outcome by historical standards"."

Is this an example of the end of the free market?

peter said...

"Mmmm" signifies that the Coalition used a net figure to claim that Rudd would "lump every Australian with $9500 in debt" and then a few months later used a gross figure to claim he would lump every Australian with "over 13,000 of debt".

The effect was to make it look as the figure was increasing over time.

It wasn't.

Sure, people understand the difference between nett and gross, but not if it's not mentioned!

Look again as that photo of the debt truck. It's not mentioned.

I agree with you about the effect of the First Home Owners Grant. I put it in the story and put up the graph here to spread the word.

Andos said...

Surely the point here is that Government Debt is completely irrelevant, and that the Government should be spending more to reduce unemployment and underemployment.

peter said...

They might be succeeding.

Andos said...

By all means they have succeeded in avoiding the massive spike predicted, but unemployment (5.8%), and underemployment especially (13.9%), are still very high. (ABS Labor Force statistics, August 2009.)

It seems that the 'gold standard' polemicists carry great influence with the Government in regards to tackling unemployment and underemployment in this country (i.e. public debt is always bad, public surplus is always good... a total fallacy).

Andos said...

Correction: 13.9% is labour underutilisation.

KitchenSlut said...

So are the Westpac numbers above gross or nett as this doesn't seem to be mentioned either or do I need to go to the Westpac document detail?

I know its an old thread but had a look in as there is an email currently doing the rounds quoting Nine's Ross Greenwood:

Ross Greenwood: Quote: Ross Greenwood of Money News.
Right now the Federal Government is at pains to tell everyone - including us the mug-punters and the International Monetary Fund that it will not exceed its own, self-imposed, borrowing limits. How much? $200 billion. And here's a worry. If you work in a bank's money market operation; or if you are a politician; the millions turn into billions and it rolls off the tip of the tongue a bit too easily. But every dollar that is borrowed, some time, has to be repaid. By you, by me and by the rest of the country.
Just after 5 o'clock tonight I did a bit of maths for Jason Morrison. But it's so staggering its worth repeating now. First though; here's what Chairman Rudd has been saying about - what he calls - these temporary borrowings. Remember those words: temporary deficit. but the total Government debt could end up around $200 billion. So here's a very basic calculation ... I used a home loan calculator to work it out ... it's that simple. $200 billion is $200,000 million. The current 10 year Government bond rate is 4.67 per cent. I worked the loan out over a period of 20 years.
Now here's where it gets scary ... really scary. The repayments on $200 billion come to more than one and a quarter billion dollars - every month - for 20 years. It works out we - as taxpayers - will be repaying $154 billion in interest and principal every year ... $733 for every man woman and child - every year. The total interest bill over the 20 years is - get this - $108 billion. Remember, this is a Government that just 18 months ago had NO debt . NO debt. In fact it had enough money to create the Future Fund to pay the future liabilities of public servants' superannuation ... and it had enough to stick $20 billion into the Building Australia Fund last year ...

Money News Presenter, Ross Greenwood

Curiously from a google this quote appeared online around the time the numbers above were forst being bandied about. It is now doing the rounds of emails and also curiously with motoring groups like the websites of WRX Perth, V8's and Harley riders.

Peter Martin said...

Thank you KS.

How weird. On Greenwood's numbers the gov would need to raise an extra $15 billion per year to cover payments when debt peaks.

Westpac's forecast of a peak in - net - debt only half as high (backed up now by the Commonwealth Bank) would halve that to, say, $8 billion.

By then Government revenue is projected to be above $340 billion per year.

It would need to lift that revenue by 2.3% (by less than 1% of GDP) to meet the repayments.

Call that scary if you want. I'd call it a small price to pay for the benefit the borrowing did us.

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