Debts and Deficits.

The latest issue facing the Australian government is, supposedly, the budget deficit and resulting public debt. Senator Ian Macdonald has referred to our debt situation as “horrendous”.

That sound you just heard was all the informed Americans and Europeans laughing their collective arse off. Australia’s level of public debt is pitiful, sitting at around 30% of GDP. Compare this to the US with about 100%, the UK with about 90%, or Japan on well over 200%. Australia’s budget deficit was 1.2% of GDP last year, while our GDP itself grew at over twice that rate over the year. So why is the government trying to make us believe it’s a big deal?

Several reasons. First is they’re still thinking like an opposition. Their policies are defined by what laws they’ll repeal, what deals they won’t make, what taxes they won’t collect, and not by any positive activity. A budget deficit sounds bad, and it’s easy to blame it on the previous government, who’ll be the only credible alternative when election time rolls around.

Second is they, or at least some of their number, genuinely believe it is a big deal. Neo-liberal dogma has them running scared of deficits. But neo-liberal dogma is what got us into this crisis in the first place, six years ago, and Keynesian deficit spending, which I’ll explain in as simple terms as I can below, is precisely how our government at the time helped Australia avoid the recessions that plagued most of the rest of the Western world.

Generally speaking, yes, it’s bad to be in debt, all other things being equal. But all other things being equal is the mother of all caveats; and especially on such a large, public scale, they never are. And deficits don’t even have to always amount to increasing debt, in real terms. Say I borrow $500k at 5% interest to buy a house I don’t need for five years yet, and rent it out for $20k a year for those five years, during which time its market value rises to $600k. The rent (initially) doesn’t even cover the interest payments of $25k a year; yet I’ve still saved $75k over choosing to wait until I actually need the house.

If the rate at which something appreciates is higher than the going interest rate, it pays to borrow to have it now. In the case of government borrowing, that something is the Gross Domestic Product. You can run a permanent deficit, and so long as it’s lower than the rate of growth of your GDP (in nominal terms, unadjusted for inflation), and so long as you’re paying off the interest on your debt, your debt as a fraction of GDP will shrink. This is what happened last year, and what happens in most normal years: although we had a deficit, the growth in our GDP made up for it, so our debt actually went down in real terms. Sometimes it’s necessary to run a bigger deficit than this for a few years, as PM Rudd did to avoid the Great Recession; and that’s OK, so long as you pay it down in normal years. Massive deficit spending to finance the Second World War is what finally lifted America out of the Great Depression, for another example.

Now, it’s my opinion that taxes probably aren’t high enough in Australia, and I’m all in favour of raising them, particularly on resource extraction, which gets billions in unnecessary tax breaks every year. But all the extra money that goes directly toward lowering the nominal (as opposed to real) debt, is money that’s not going toward infrastructure, welfare, education, healthcare — all of which contribute to growing our GDP, which has many obvious positive effects in addition to lowering our real debt. Framing a proposed 1% tax hike on people on over $80k a year (which I would normally be in favour of) as a “temporary measure” for “deficit relief” is entirely the wrong way to go about things. It looks for the moment as though it won’t go through, but for all the wrong reasons.


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