Not surprisingly, the page one lead of today’s edition of The Australian blared “Hard cuts needed to save the budget”. The piece warned of the need for “painful cuts to growth in public health and education spending” in order “to avoid a European-style debt quagmire”, based on a new report from the Grattan Institute.
The report was released on Sunday but provided to journalists under embargo last week, to maximise its exposure. It asserts that the combined deficit of Australian governments will rise “to an alarming 4% of GDP by 2023”. Assuming that GDP grows by around 2.5% a year (roughly trend) for the next decade, the current $1.5 trillion current estimate of our GDP will grow to around $1.9 trillion. If the 4% estimate is based on that, the combined deficit will be equal to roughly $70 billion. If it is based on current figures it will be around $60 billion.
Financing those deficits will boost debt, which is currently around 10% of GDP (or roughly $150 billion) in net terms. A decade of deficits would see several hundred billion dollars of debt issued — say to around $700 billion, without any corrective moves by government. That’s high (just under 50% of GDP), but a long way from the “European-style debt quagmire”.
To become such a quagmire, the ratio would have to soar sharply to around 80% (currently Germany’s level — and The Australian and no doubt the Grattan Institute would argue it is a well-run economy) or more. Australia would have to issue more than a trillion dollars of debt in the next decade to become a member of the quagmire club. Germany, by the way, still has a AAA stable credit rating at that debt-to-GDP level. It’s forecast to fall to 77.5% next year, if the eurozone doesn’t tank. Germany’s deficit to GDP level much lower than Australia’s — it was around 1% in 2011. But deficit to GDP ratio isn’t a key measure, it’s the level of debt as a percentage of GDP.
This is not to say unchecked increases in debt are a good thing. They are not, spending needs to be contained and the budget’s revenue base needs rebalancing and widening, if possible. Rather than new spending, we should try curtailing it and reshaping current spending patterns to produce immediate savings, rather than simply spending those savings.
But just cutting spending to the exclusion of everything else (including tax rises and broadening) smacks of the lightweight partisanship and Tea Partyish, Laffer curve nonsense that passes for economic policy-making from the conservative wings of the American commentariat.
But the tenor of the coverage this morning of the Grattan paper takes you back to the early days of the Howard government after its election in 1996, or Paul Keating’s banana republic comments a decade earlier.
The panic merchants obviously haven’t taken on board the debunking last week of the Carmen Reinhart-Kenneth Rogoff paper that asserted economic growth could disappear once a country’s debt-to-GDP ratio moved past 90%. Two academics and a 28-year-old graduate student at an American university blew a great hole in the Reinhart-Rogoff paper. Its implied “cut spending to achieve growth” approach and the use made of it by people, especially in Europe (to justify the austerity regimes forced on countries such as Ireland, Portugal and Greece) is now under attack.
For example, Adam Posen, a former member of the Bank of England’s key monetary policy committee wrote at the weekend:
“The claim that there was a clear tipping point for the ratio of government debt to GDP past which an economy’s walls caved in never made any sense. If such a critical level were to hold, there would have to be some equally abrupt causal mechanism by which the dire predictions for growth would have to come to pass — perhaps interest rate rises, a currency crisis or an increase in hoarding and saving resulting from feared future tax rises? Such an event would be clearly visible in the data among those countries that went past the debt event horizon of 90%. But it is not there.”
And Financial Times associate editor Wolfgang Munchau was today tougher, writing:
“Many policy makers have interpreted this rule as a call to reduce debt to below that level for the sake of growth. Profs Reinhart and Rogoff have thus become the intellectual godmother and godfather of austerity… Especially in Europe, pro-austerity policy-makers have tried policies based on their research with catastrophic economic and human consequences. The Harvard economists’ tragedy is not the misuse of a Microsoft Excel spreadsheet but the misuse of Microsoft PowerPoint. They hyped their results. In doing so, they followed the golden rule of tabloid journalism: simplify then exaggerate.”
And we saw some of that with the Grattan paper (which played to the obsessions of the conservative commentariat). It’s a pity the paper wasn’t more complete with some suggested tax changes and other ideas to stabilise the budget and its revenue base.
Would Grattan follow-up papers be greeted with the same unquestioning page one treatment if they suggested a higher and broader GST and getting rid of or reducing dividend imputation? More likely, the national dailies and others would fall upon the Institute and give it a right mauling (in a familiar Tea Party way), which would be a bit 2010 when Reinhart-Rogoff was all the rage.
Campbell Newman is part of this “the sky is falling” crowd of debtdoomsters. Worth remembering that in his election campaign he promised to increase spending on country racing clubs and private schools and to fund large cuts in payroll tax. So much for the need to cut debt by reducing spending. Conservatives hate payroll tax (which they attack as a tax on employment which I guess is what income tax is more all PAYE taxpayers)because they can’t dodge it. You’d think if they were serious about reducing deficits they’d actually look to increase taxes on the wealthy and to cut spending on things like private schools.
Glenn,
Your “tea party” perjorative label applied to anyone who advocates fiscal restraint in government spending reveals the political partisanship at the heart of your article.
What cannot be avoided is that Europe is in deep economic trouble because too few people are producing the wealth that is consumed by the whole community. However you might express this, it strongly implies that Europe as an economic model, with its tightly regulated labour markets, constraints on corporate innovation and flexibility and high tariffs hiding behind its increasingly absurd customs barrier is now unsustainable.
The absence of obvious signs of collapse Pose describes are actually happening now, with desperate emergency interventions by the European Central Bank on an almost monthly basis papering over the cracks.
Eventually, the whole of Europe will run out of money when its entire debt to GDP ratio becomes unsustainable. Then the Euro will collapse, Europe will take a massive pay cut and that rediculous customs barrier will finally come down as they work out the people outside it are more prosperous than them.
All this is a cautionary message for economic policy in Australia as many people are saying. These people are not part of some lunatic fringe on the extreme right but people who are alarmed at the rate that this government is accumulating debt with scant regard to its eventual consequences.
It is a mistake to only look at the the Federal Government debt. The measure of public debt must include state debt, which is around $260 billion. Also, the gross federal government debt, a more accurate measure is nearly $300 billion, which brings the currrent level of public debt close to $600 billion or 50% of GDP.
If we continue to run deficits for another decade, the public debt in this country will be similar to Europe’s.
Labor’s focus on deficits to save jobs is short sighted and sacrifices our children’s future. Only higher taxes can fix the damage Labor has inflicted on the economy since it has come to power. Mr Swann and his Labor colleagues do not understand that no contry has ever taxed its way into prosperity. Yet that is all we see Labor do, to meet its profligate spending policies.
The UK have been warned to wind back their austerity budgets as they are stifling growth and will contribute to a recession