Several months out of date but I found it an interesting article just the same.
Get the facts and figures right - there is no debt crisis
May 15, 2012
John Watson
Vanstone's claims are dodgy, unreliable - and wrong.
FACTS and the truth are partners. When Amanda Vanstone tries to conjure a national debt crisis, facts are few and far between - and unreliable. She starts with a misleading analogy, makes a few dodgy comparisons, throws around a couple of big scary numbers and then gets the key figure wrong.
''By the time a new government takes office, net government debt will be close to $300 billion, about four times the debt the Howard government paid off,'' she claims. No it won't. Vanstone is out by around $160 billion. And on current values, the debt is about half as big as the one the Howard government paid off.
Of course, Vanstone is mistakenly referring to gross debt. Even that debt, currently about $230 billion, is likely to fall some way short of the magic ''$300 billion'' figure that has been put about for years. Still, $143 billion - the level at which net debt is forecast to peak this financial year - seems like a horrendous amount of money for anyone to owe.
Well, let's return to one of the homely analogies favoured by Vanstone. The ability to manage a debt can only be assessed sensibly against income, as anyone who runs a household budget or business knows. They would also know that banks and other lenders require borrowers to present a statement of their income and assets against their spending, borrowing and other liabilities, so the lender gets a full picture of their financial status. That is why net debt is a more balanced indicator of the state of government finances.
And if the Commonwealth were a household, lenders would be falling over themselves to give it money, and they are. Average household debt in Australia has come down a bit but is still about 150 per cent of annual income. The government's gross debt is worth about 18 per cent of GDP. It is forecast to peak at $281 billion in 2013-14, when it will be just over 70 per cent of revenue - the government's income for that year.
So what kind of repair job awaits the next elected government? Will the Howard government's difficulties in paying off the $96 billion debt inherited in 1996 - also a recession hangover as revenue had only just recovered - be a ''picnic'' by comparison, as Vanstone claims? Only if growth in the economy and revenue since 1996 is entirely ignored.
In the last Keating government budget, revenue was $124 billion; it is now $369 billion, or three times as much. Net debt then was just over 18 per cent of GDP and 77 per cent of revenue. This year, net debt peaks at about 9.6 per cent of GDP, or 39 per cent of revenue, falling below 9 per cent of GDP around the time the next election is due. In relative terms, then, today's debt is about half as big as it was in 1996.
Still, $143 billion does seem like a lot of money. Surely, it will take ''generations'' to pay off, as claimed. Again, the financial statements that real-world lenders rely upon tell us something different. The Howard government paid off all debt by 2006, despite strong growth in its spending. But revenue had also risen to 25.7 per cent of GDP, compared to the current year's 22.3 per cent. That difference in receipts alone is worth about $50 billion a year.
Of course, that revenue has been lost to the impact of global recession. However, if we look at the budget's recovery from a downturn in 2000-01, the Howard government had more money than it knew what to do with, even as it paid off debt. Despite a sustained, much-criticised spending splurge, the government banked surpluses totalling more than $80 billion in six years. The windfall revenue alone - gains that had nothing to do with budget policy decisions - exceeded the debt repayment several times over. An analysis in the Treasury Economic Roundup in early 2008 shows that from 2004-05 to 2007-08, windfall revenue totalled $334 billion, of which the Howard government committed $314 billion to new spending or tax cuts.
All this suggests Commonwealth debt is perfectly manageable, indeed comfortingly low. The Australian government has never before had the highest possible credit rating from all three major rating agencies. The world's lenders and investors agree the government's debt is nothing to worry about, and they put their money where their mouths are. Commonwealth bond yields (the cost of government borrowing) are the lowest on record. The truth is the government's lenders have no concern about risk, or they would demand a risk premium.
Yet again, those with a political interest in manufacturing a crisis are casting facts overboard.
John Watson is a senior writer.
Follow the National Times on Twitter: @NationalTimesAU
Get the facts and figures right - there is no debt crisis
May 15, 2012
John Watson
Vanstone's claims are dodgy, unreliable - and wrong.
FACTS and the truth are partners. When Amanda Vanstone tries to conjure a national debt crisis, facts are few and far between - and unreliable. She starts with a misleading analogy, makes a few dodgy comparisons, throws around a couple of big scary numbers and then gets the key figure wrong.
''By the time a new government takes office, net government debt will be close to $300 billion, about four times the debt the Howard government paid off,'' she claims. No it won't. Vanstone is out by around $160 billion. And on current values, the debt is about half as big as the one the Howard government paid off.
Of course, Vanstone is mistakenly referring to gross debt. Even that debt, currently about $230 billion, is likely to fall some way short of the magic ''$300 billion'' figure that has been put about for years. Still, $143 billion - the level at which net debt is forecast to peak this financial year - seems like a horrendous amount of money for anyone to owe.
Well, let's return to one of the homely analogies favoured by Vanstone. The ability to manage a debt can only be assessed sensibly against income, as anyone who runs a household budget or business knows. They would also know that banks and other lenders require borrowers to present a statement of their income and assets against their spending, borrowing and other liabilities, so the lender gets a full picture of their financial status. That is why net debt is a more balanced indicator of the state of government finances.
And if the Commonwealth were a household, lenders would be falling over themselves to give it money, and they are. Average household debt in Australia has come down a bit but is still about 150 per cent of annual income. The government's gross debt is worth about 18 per cent of GDP. It is forecast to peak at $281 billion in 2013-14, when it will be just over 70 per cent of revenue - the government's income for that year.
So what kind of repair job awaits the next elected government? Will the Howard government's difficulties in paying off the $96 billion debt inherited in 1996 - also a recession hangover as revenue had only just recovered - be a ''picnic'' by comparison, as Vanstone claims? Only if growth in the economy and revenue since 1996 is entirely ignored.
In the last Keating government budget, revenue was $124 billion; it is now $369 billion, or three times as much. Net debt then was just over 18 per cent of GDP and 77 per cent of revenue. This year, net debt peaks at about 9.6 per cent of GDP, or 39 per cent of revenue, falling below 9 per cent of GDP around the time the next election is due. In relative terms, then, today's debt is about half as big as it was in 1996.
Still, $143 billion does seem like a lot of money. Surely, it will take ''generations'' to pay off, as claimed. Again, the financial statements that real-world lenders rely upon tell us something different. The Howard government paid off all debt by 2006, despite strong growth in its spending. But revenue had also risen to 25.7 per cent of GDP, compared to the current year's 22.3 per cent. That difference in receipts alone is worth about $50 billion a year.
Of course, that revenue has been lost to the impact of global recession. However, if we look at the budget's recovery from a downturn in 2000-01, the Howard government had more money than it knew what to do with, even as it paid off debt. Despite a sustained, much-criticised spending splurge, the government banked surpluses totalling more than $80 billion in six years. The windfall revenue alone - gains that had nothing to do with budget policy decisions - exceeded the debt repayment several times over. An analysis in the Treasury Economic Roundup in early 2008 shows that from 2004-05 to 2007-08, windfall revenue totalled $334 billion, of which the Howard government committed $314 billion to new spending or tax cuts.
All this suggests Commonwealth debt is perfectly manageable, indeed comfortingly low. The Australian government has never before had the highest possible credit rating from all three major rating agencies. The world's lenders and investors agree the government's debt is nothing to worry about, and they put their money where their mouths are. Commonwealth bond yields (the cost of government borrowing) are the lowest on record. The truth is the government's lenders have no concern about risk, or they would demand a risk premium.
Yet again, those with a political interest in manufacturing a crisis are casting facts overboard.
John Watson is a senior writer.
Follow the National Times on Twitter: @NationalTimesAU
