Is Government Debt Good or Bad? (and did Kevin07 destroy Howard & Costello’s outstanding economic work?)

by | 19 Dec 2019

Is ScoMo right that that it would be irresponsible to rack up more debt now, by fast-tracking infrastructure spending?

And did Kevin07’s government destroy all the good economic work that Howard & Costello did, by going on a typical Labor spending-spree racking up stupid amounts of debt after the slate had been wiped clear after years of diligent saving?

Kevin Rudd
John Howard & Peter Costello

A quick Economics 101 lesson if I may:  

GDP = C + G + I + NX

That is, a country’s Gross Domestic Product (the commonly-accepted economic health measure) is the sum of Consumer spending + Government spending + Investment by businesses + Net Exports.

So, if consumers reduce their personal spending AND if businesses cut back on purchases and hiring (both of which happened in 2009 and has been happening again in 2019), that leaves it up to the Government and Exporters to cover the drop-off from the other two.

In 2019, Australia’s net exports have been pretty healthy off the back of the rocks we dig out of the ground combined with a weakening Aussie Dollar (a lower AUD means that mining companies get more Aussie bucks for every US buck that rocks get sold for), but with China & India’s economies slowing down faster than most have been expecting, there is a risk that our net exports could drop off too. Although that would also likely cause a further reduction in the AUD/USD, which helps balance it out.

Consumer spending in 2019 has grown at HALF the rate it was forecast to, whilst businesses have either been hesitant to spend or have been unable because banks won’t lend them the money to do so.

Which leaves it to the Government

This puts a lot of reliance on the Government’s shoulders if GDP is to be maintained above zero.

Keeping in mind that a technical recession is two consecutive quarters of negative GDP growth.

But the Government is already spending a fair bit. In the 12 months to June 2019, a staggering 8 out of 10 new jobs in Australia were in the public sector. Wow.

That’s a lot of people turning up to work at 9am, taking incessant coffee-breaks, chats at the water-cooler and shutting down their computer at 4:38pm before taking a flex-day after having contributed nothing to society (other than paying income tax and spending their pay check in the economy, which IS actually a good thing!).

Ok to be fair, the latest Qld statistics from June 2019 did list a decent number of extra front-line medical staff, teachers, ambos & firies; so not all public servants contribute nothing to society!!

Back to economics. And facts.

Up until 2008, Australia rode a massive economic prosperity wave; huge amounts of rocks were in demand, housing demand was through the roof and everyone was on a massive spending spree (in 2007, consumers were spending more than they were earning!).

Then the world collapsed; except it didn’t actually in Australia. Because we had been the lucky country for years. Honestly, Howard & Costello had been getting economically kissed on the ____ for years, it wasn’t pure economic genius. In fact, there is no shortage of Economists out there who have good argument for how H&C’s government p__sed it all up against the wall, particularly when you compare Australia’s application of tax revenues to that of Norway’s when they had a commodities boom.

When the GFC hit, Kevin07’s government was forced to pump money into the economy in order to avoid a recession (i.e. negative GDP, because consumers & businesses pulled back spending).

By racking up debt.

Ok maybe the application of the theory wasn’t great – those $900 cheques actually SHOULD have been delivered as retail vouchers to ensure people actually bought new TVs (rather than a cheque that could be used to pay down your credit card balance and thereby add no economic value), those insulation batts had a few issues and more than a few school halls cost a little extra than what a non-government tender may have achieved.

But, it is simple economic fact, that racking up government debt to put money into the economy via consumers and business, WAS necessary, and it DID contribute to helping Australia be one of the only 1st world countries to avoid a recession.

Fast-Forward to 2019

Now, after 11 years of BOTH sides of the political divide having racked up more and more government debt (although it has now plateaued since 2017), the RBA Governer Philip Lowe is calling for the Federal Government to step in, because the RBA is nearly out of gunpowder.

Let’s keep our prospects ahead in check though:

  • Our Debt to GDP is at about 40, which is
  • Significantly lower than other developed countries, such as the UK’s 80, EU 82, Canada 90, France 98, US 106, Italy 135, Greece 181 and Japan 238 (ok let’s not tout the last 3, they’re not targets!); and
  • Countries doing better than us on the Debt/GDP scale include Norway at 36 (arguably the best-off country in the world), Switzerland 28, NZ 20.

So when you compare those above & below us, our balance sheet is far far closer to the stronger countries’ than it is to the world’s major economies. Now it’s not all that simple; big economies with strong currencies (e.g. US/UK/EU) are able to raise & hold more debt than smaller ones. But the important point is:

Australia arguably still has safe borrowing capacity.

As long as it’s for development & investment purposes, NOT for spending on the credit card.

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