Wednesday, July 21, 2010
Who wouldn't want to be debt-free?
It's what Tony Abbott wants; it's what Joe Hockey wants. Their latest mantra is "reduce the deficit, get rid of the debt".
And its what Wayne Swan wants. His Budget proudly predicts an end to government debt in seven years time, three years ahead of what had been expected.
(By the way, The Coalition isn't actually promising to pay off government debt materially sooner than Labor. Joe Hockey told me yesterday that he wasn't yet in a position to make such a promise. But you wouldn't know it from its rhetoric about the urgency of the task.)
The truth is no Australian with prospects wants to be debt-free over their entire lives, and no business with prospects wants to be debt-free at all.
For an entity with the prospects of the Australian government to want to be debt-free is to elevate a lazy balance sheet to the status of policy goal...
We should be thankful the Coalition didn't take that stance when it was running the country in the 1950s and 1960s. As Reserve Bank Governor Glenn Stevens helpfully reminded us at a speech in Sydney yesterday "in any number of countries, including our own, public debt ratios have on some past occasions been much higher than 100 per cent".
The fast growth itself brought down the public debt to GDP ratio, although as Stevens notes it wasn't until the 1960s that it fell to the "50 or 60 per cent that today is often regarded as a sort of benchmark".
In fact right now Australia's government debt to GDP ratio is somewhere south of 6 per cent. It is set to peak at 6.1 per cent in one year's time.
It is true as Tony Abbott said yesterday the government is borrowing "$100 million a day, every day". This year the budget deficit will be $40 billion. Divided by 365 days the borrowing requirement works out at $109 million per day.
Next year the forecast deficit is $10 billion. By Abbott's logic the government will then be borrowing $27 million per day. The following year the budget should be in surplus -whichever party is power based on their published projections. The government will borrow nothing.
Which is set to cause problems. Bear with me for a moment.
The Coalition would have us believe that borrowing itself causing problems.
As the Shadow Treasurer tells the story, "for so long as the Commonwealth Government, as the 800 pound gorilla in the market place, is borrowing at least $100 million every day in competition with the private sector it’s going to be harder for small business to borrow money. It’s going to be more expensive for small business to borrow money."
The money market is like a bucket, in the view put forward by Coalition. When government takes money out of the bucket, there's less left in for private borrowers. To be sure they can get money they need to offer to pay more.
Except that that's not how it works. Just as "most of our imports come from overseas," in the words to George W Bush, most of our capital comes from overseas. Australian government borrowing, insignificant on a global scale, would do as much to push up worldwide interest rates as spitting in the ocean would do to raise the sea level.
Abbott might know this. Market economists know it. At the business economists function at which Stevens spoke yesterday the master of ceremonies asked the audience of 370 to raise their hands is they believed one side of politics will apply more downward pressure to interest rates than the other.
Not a single hand went up.
Asked if he agreed with an audience comprised of Australia's leading private sector economists, Governor Stevens replied amid laughter and clapping, "I have two words - no comment".
"I am not going to venture into campaign promises. The broad picture here is that government spending has been quite prominent in overall demand, there’s a period coming we think where it’s going to hand over to private spending," he said.
Members of his audience would have been highly attuned to the biggest problem many of them face - finding enough government debt.
Not all debt is created equal. Australian government debt is about the most highly-prized there is. Bank's need to hold it in order to fulfill prudential requirements. Tighter requirements being negotiated at the Bank for International Settlements will probably require them to hold more.
The previous government, which boasted of being debt-free met the demand by continuing to sell bonds which it offset by buying other financial instruments.
It's a good thing it did. Had it not Australia would not have had a functioning government bond market and would not have been able to easily raise money when the financial crisis struck. As it was, it found it hard - many lenders had no history of dealing with the Australian government. It's the same problem householders and businesses face if they haven't bothered to build up a credit record.
Good business management demands debt. Few businesses can grow without it. The Coalition has given a nod to this truth in the items of government "spending" it is proposing to cut back in order to more quickly reduce debt. The biggest one is the National Broadband Network - a nation-building program probably rivaled only by the Snowy Mountains Scheme.
For all I know it'll be a white elephant, but it is emblematic of the sort of things debt is used for - advancing the nation rather than holding it back.
Published in today's Age
Australian Treasury - A history of public debt in Australia
Glenn Stevens - Some Longer-run Consequences of the Financial Crisis
. Savings? The Coalition has just has found an extra $1.2 billion
. Did Stevens say Barnaby's not fit for the job?
. "I'll keep prices and rates low" - there's an idea