Default on Debt Conversation

The debt debate is over with the political class, writes Professor Sinclair Davidson.

Recently on The Bolt Report Michael Kroger—former IPA director and now Victorian Liberal Party president—made the point that it was a great pity that the argument on deficit and debt had been lost. The loss of the deficit and debt argument is a tragedy on many levels—not least because the argument was lost by the Liberal government, in office, through neglect and overreach. Not to mention arrogance.

In opposition the Coalition had, quite rightly, held the former ALP government’s fiscal management to ridicule. When then Treasurer Wayne Swan announced an early return to budget surplus in 2012, Joe Hockey’s explosive booming laugh was heard across the nation. But things went downhill quickly after the Coalition returned to office in 2013.

On 30 June 2007, the Commonwealth owed about $58.3 billion in debt. That was a nominal amount that the Federal government kept on issue in order to establish the so-called risk-free rate. By June 2013—a mere 6 years later—that amount had exploded out to $257.4 billion. That is over a four-fold increase in the amount of debt. The federal budget had deteriorated from a nearly $20 billion surplus to a deficit of nearly $50 billion.

In the Labor Party’s defence, their first term of office coincided with the GFC. They justified their fiscal irresponsibility by pointing to their various stimulus packages and the fact that Australia avoided a ‘technical’ recession. The GFC, however, does not explain why government spending ratcheted up, and stayed up, rather than declining when the crisis had clearly passed.

To their credit, the Labor government had also established a debt ceiling. To be clear debt ceilings are somewhat symbolic affairs because they can be increased by the Parliament, but its function is to place some limit on how much is borrowed, if only through reputational damage and publicity if and when the government has to request Parliament to raise the limit.

The debt limit—first established at $75 billion—was quickly raised to $200 billion, $250 billion, and then to $300 billion. Finally, the newly elected Coalition government wanted it raised to $500 billion. By July 2017, Commonwealth debt had reached $492.9 billion—just less than the debt ceiling would have been. Would have been, because the debt ceiling was abolished in December 2013 by the Coalition in cahoots with the Greens. Given that the Greens are not usually noted for their economically responsible views, that should have been a warning to us all as to what was going to happen next.

There was little pressure to cut spending and little spending was cut. Worse, the Coalition government honoured the big spending initiatives of the outgoing Labor government.

Gonski. The National Broadband Network. The National Disability Insurance Scheme.

As John Roskam has argued, it seems that the only function of Coalition governments is to finance the expansion of the state that Labor initiates.

When you find yourself at the supermarket check-out with insufficient funds to pay for your purchases, you don’t then double up on the stuff you want to buy and borrow more to pay for it. Rather, you buy less. It is called living within your means. Our national government just spends more. They have run out of our tax dollars and so borrow future tax dollars to spend now.

Now there are lots of silly arguments to justify government debt. It turns out that people think government borrowing is cheap. In a low-interest rate environment, we are told, government should borrow more. Finance is cheap.

Well, no. Government debt is not cheap. This is a classic instance of French economist Frederic Bastiat’s famous statement of what is seen and unseen. What is seen is the rate that lenders require to earn in order to make a loan to the government. It says nothing about the merits of government spending. What lenders care about is the governments’ ability to tax and not default on its obligations (that includes not inflating the debt away).

Most government spending constitutes current consumption. The single largest component of government spending is welfare. Now we can quibble about whether the age pension is welfare or a past obligation (I tend towards the past obligation view), but the fact is that we are borrowing from the future to either pay off past obligations—that is, government has become a Ponzi scheme—or we are borrowing to pay for current consumption. Either way it’s not good.

Government investment tends to be poor investment. Does anyone other than Christopher Pyne think that the submarine deal is a good idea? That the National Broadband Network is a good investment? That knocking down perfectly good school halls and rebuilding them constituted an investment in education? The fact is government debt doubly punishes Australians— money is taxed in the future and wasted in the present.

Money that is invested in government bonds and then wasted on current consumption, pork barrelling, white elephants, and the like, is not invested in building up the productive capacity of the economy. One of the greatest fallacies of modern political economy is that the act of spending a dollar is important irrespective of who spends that dollar, or why it is being spent. In this view of the world there is no difference between burying money in disused mine shafts and having the private sector dig it up, and developing a new mine and selling coal or iron ore or gold to willing and paying customers in China or India. Yet sensible people know and understand that there is a world of difference between those two things.

The fact that politicians understand that Australians prefer their budgets to be balanced, or actually in surplus, adds to the problem. The Coalition seem to have decided they need more tax revenue to pay for the higher levels of spending. We’ve seen this before—after the Whitlam government increased spending, tax revenue rose to validate that spending.

So we are seeing a large number of hare-brained schemes to raise taxes. Not to mention the raid on superannuation.

The bank levy. The Google Tax. Profit-shifting and base erosion.

Then there are the ever increasing crack-downs on so-called welfare rorts.

To be clear—taxes that are liable to be paid should be paid. Welfare rorts should be minimised. But to spend more in collecting tax than the tax actually raises is folly. To give people money to have children that they really can’t afford is irresponsible.

Ultimately, the problem is that government takes the view that any and every problem can be solved by throwing money at it. Every policy or program must either be a welfare policy or an industry policy. So hand-outs for people or hand-outs for organisations.

In this environment nobody wants to link irresponsible government spending to incoherent policy to the collapse in private sector investment. Less investment now means lower prosperity in future. Added to that, we know that there will be higher taxes in the future to pay for the current irresponsible spending that will result in lower prosperity. That translates effectively into lower living standards. Talk about adding insult to injury.

The link between current deficit and debt and future reduced living standards is clear to anyone who wants to look for it. Unfortunately, we have a political class that is largely in denial. Some are craven, others are malevolent. So much better to punish banks for imagined slights or socially engineer our lifestyles choices than explain to people that the NDIS is simply unaffordable, or that the NBN was always going to be more expensive yet slower than current offerings. The NDIS is an industry policy dressed up as a welfare policy. But for the ACCC, the private sector would have built the NBN (or equivalent) a decade ago.

Wasting money has consequences. Those consequences will manifest themselves in lower living standards than otherwise would have been the case. Nothing exemplifies waste more than persistent government deficits that have to be financed by growing debt.

The late economics Nobel laureate James Buchanan wrote a lot about the ‘old-time fiscal religion’. By this he meant the common sense notions that ordinary people have that government spending should be tightly controlled, and budgets should be balanced. Over the past 75 years or so, policy elites have tried to undermine that understanding of the world. Australians know better and should trust their judgement in this matter. We all know that deficit and debt are a problem and we should clearly articulate our concerns to our Canberra representatives.