Australia’s net debt was A$174.5 billion in September 2013, when the Coalition took office. The debt is forecast to grow to $872 billion in 2020-21 (44.8 percent of GDP). Then it is forecast to hit $1 trillion in 2021-22 (50.5 percent of GDP). Then, $1.1 trillion in 2022-23 (51.6 percent of GDP).
Yet, as a proportion of GDP, our debt will remain low relative to many other OECD countries.
Oliver Blanchard, the former chief economist of the IMF, has stated that where interest rates are expected to remain below growth rates for a long time, the issuance of debt without a later increase in taxes may well be feasible. Public debt may have no fiscal cost. If interest rates remain below the rate of economic growth, debt will fall as a share of GDP. This situation helps explain why the IMF is urging increased government expenditure following the pandemic.
The Reserve Bank of Australia has publicly stated that it expects near-zero interest rates to stay at that level for at least 3 years.
Australian government debt is not like household debt or private sector debt. As a currency issuer, the Australian government cannot become bankrupt. The limits on government spending arise from the economy’s capacity constraints (availability of workers, capital equipment, and natural resources, the economy’s productive capacity) and the risk of excessive inflation.
Since the Global Financial Crisis of 2008, the banking system in Australia and around the world has once again been issuing enormous amounts of new credit. But this new credit has not translated into adequate investment in real, productive capital assets. Instead, it has more often been channeled into property price inflation and unprecedented consumer indebtedness.
Historically low-interest rates would give an incoming Federal Labor government an unprecedented opportunity to lead economic recovery through capital and recurrent investments that will increase economic growth, productivity, and labour force participation, as well as aiding the transition to a zero-emissions economy. This would benefit both business and workers and contrasts with the Coalition’s approach which has no comprehensive jobs plan and contains poorly targeted tax cuts that will neither enhance productivity nor maximize spending.
It is in this context that Labor needs to reconsider the platform it took to the last election which was to achieve a balanced budget on average over the economic cycle.
Even before COVID19, very few OECD countries had “balanced their budget over the cycle” dating back to the GFC. Australia’s deficits over that time cumulated to over 20% of GDP. To meet this rule after the GFC would have required higher taxes and/or reduced spending equivalent to a cumulative $400 billion over the previous cycle.
After COVID, of course, deficits across the OECD are much larger. Trying to balance the budget, in aggregate, over the next cycle (that is, from now to the next downturn) would require enormous fiscal austerity that would almost certainly and needlessly prolong the recession.
The Coalition expects deficits to continue for at least a decade. The projected underlying “structural” deficit is forecast to narrow but still remain significant a full decade from now (p. 4-13 of Budget Paper #1). To swim against this tide would require, again, some combination of enormous tax increases and/or enormous spending reductions at a time when Australia’s economy can afford neither.