Flat White

Why our fiscal situation is much worse than you think

20 September 2021

4:00 AM

20 September 2021

4:00 AM

According to the latest International Monetary Fund data, Australia’s budget deficit and level of public debt are set to reach record highs this year.  The pandemic-induced national budget deficit for calendar 2021 will be 10.4 per cent of GDP, significantly higher than last year’s deficit of 9.9 per cent.

Budget deficits, the difference between government revenue and expenditure, attract attention because they signify a government’s annual borrowing needs, with Australia’s deficit predicted by the IMF to stay higher for longer into the future than for the advanced economy group on average.   

Canada, Denmark, Norway, Portugal, Singapore, Sweden and Switzerland, for instance, are expected to have balanced their budgets by 2025, though Australia by then will still be running a deficit of over 3 per cent of GDP. 

Historically sizeable budget deficits are also being chalked up by emerging, middle income and developing countries, with no end in sight for most.  These deficits have commandeered a massive pool of global private saving and diverted it from funding private investment which augurs poorly for future long-term growth of the world economy.   

Australia’s fiscal outlook may look grim on these numbers.  But it is actually worse because the standard annual budget deficit measure understates the government’s call on private saving and its attendant risks.  Deficits only convey new government borrowing for any year in question.  Another annual budget indicator, rarely if ever reported, adds in government borrowing required to refinance maturing public debt run up previously that has to be rolled over in that year.   

In Australia’s case, this total budget financing need according to the IMF will be 14.7 per cent of GDP in 2021, or an annual federal government borrowing requirement over 40 per cent higher than the budget deficit alone suggests.   

This currently puts Australia’s budget financing need well ahead of most advanced economies, including Denmark, Finland, Germany, Ireland, Israel, Korea, Netherlands, New Zealand, Norway, Sweden and Switzerland.  

While Australia’s financing need is less than that of France, Italy, Japan, the United Kingdom and the United States it is misleading to compare Australia to these economies as it is a relatively small economy, with most government borrowing sourced from abroad, such that most public debt doubles as foreign debt.   

Australia’s federal public debt is on track to reach one trillion dollars in a few years, and in net terms, will by 2023 have quadrupled, rising from around 14 per cent as a proportion of GDP to 56 per cent.  This is the biggest public debt increase in the entire advanced economy group.   

In comparison, for advanced economies as a whole the rise in public debt as a proportion of GDP over this time is predicted to be 25 per cent, a number that masks the fact that many advanced economies, including Germany, Iceland, Ireland, Netherlands and Sweden, will on current projections actually reduce their public debt to GDP ratios. 

With the ballooning of Australia’s public debt since 2019, the annual government borrowing requirement can be expected to significantly exceed annual budget deficits for the foreseeable future.  And inevitable interest rate increases will add billions of dollars to the public debt interest bill and in this way act like a millstone around the economy’s neck.  

There are obviously no easy political options for containing growth in public debt.  Either taxes have to rise, or government spending has to be cut.  Other options are large scale privatisation of government assets to bolster revenue, or monetisation of the debt by the central bank via bond purchases.   

The scope for privatisation however is far more limited than when the Commonwealth Bank, Qantas and Telstra were sold off decades ago, whereas monetisation of public debt is a recipe for continued highly inequitable asset price inflation, and ultimately, a surge in goods and services inflation if thousands of years of economic history is any guide.   

That leaves tax rises or cutting spending or some combination of the two.  Increased GST, special income levies, inheritance and/or wealth taxes anyone? The IMF data shows that since 2018 revenue fell by 2.4 per cent of GDP while government spending increased by a massive 6.8 per cent, making it the main driver of Australia’s rapid and severe fiscal deterioration.  

This obviously suggests cutting government spending, particularly the overlap between federal and state government spending programs, has to be a priority.  On the very rare occasions when government spending has in the past been pared back significantly, most notably during the Hawke-Keating and Howard-Costello years, the economy subsequently flourished.  That is one of the most ignored facts of Australia’s economic history. 

Tony Makin is professor of economics at Griffith University and a former IMF economist. 

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