It may have escaped detailed scrutiny due to the ongoing COVID-19 pandemic but Australia’s budget position has also taken a serious beating.
Budget deficits seem to be a bi-partisan policy too, although the deficits being run up now are of a different scale and magnitude from those days when Malcolm Turnbull sat on the side of the “debt truck’’ which proclaimed “Labor’s debt bombshell $315 billion’’
Actually, that number was inflated at the time – net government debt was closer to $153 billion and moderated to a gross figure of $273 billion as the economy recovered – but all of these figures have now been smashed into irrelevance by a raft of spending plans.
Using the debt truck methodology, Federal government gross debt alone is already running at a record $847 billion – up from $273 billion when the coalition was elected in 2013 – and is forecast to sail straight through $1 trillion mark by 2030.
Debt reduces choices around spending and taxes
Whether that amount of debt is a good or a bad thing depends very much on your perspective but one thing that almost all economists agree on is that higher debt reduces the flexibility of governments to do things like increase spending or cut taxes to adjust for economic circumstances.
In general, some deficit spending is good if it is used in worthwhile projects that benefit the country but effectively if debt gets too big, it is spending money now and leaving the bill for future generations.
It is tempting to say this current rash of spending is “temporary” and will soon stop after the worst ravages of the COVID-19 pandemic are behind us but that appears highly doubtful.
And even if spending is reigned in hard – something that is unlikely given a looming Federal Election – that debt will remain long after the current record Budget deficits have been reined in.
The latest inter-generational report forecast Federal Budget deficits for the 40 years up to 2060-61, with interest charges on government debt become a significant outlay.
Should interest rates rise, that impost could grow very rapidly.
Unplanned spending blows up forecasts
Deloitte director Chris Richardson recently pointed out that the public-sector deficit this year will be almost 2% of national income higher than what is forecast by federal and state budgets combined.
Much of that rise was due to unplanned social spending on things like childcare subsidies that were partly but not entirely linked to the COVID crisis.
While that spending might have been needed, it was unfunded, so it is simply tacked on to the debt.
“Budget repair is important for future crisis fighting, so we’re keen to see it,’’ Mr Richardson said.
Budget austerity nowhere in sight
It is hard to see such austerity on tightening state and federal budgets anywhere on the horizon – to use one example, Australia has just signed up to the AUKUS pact which will see us buy nuclear powered submarines.
How much that will cost is a completely open question but it seems safe to assume that will be significantly higher than the now cancelled $90 billion contract with France – potentially a multiple of that number.
That is not a comment on how worthwhile or otherwise the new submarine deal may be – just an indication of large future Budget imposts that have so far not even been allowed for.
It is sobering to realise that during the allegedly high spending Whitlam Government years, Budget payments rose sharply to above 21% of GDP.
That has now risen to a staggering 31.6% of GDP in 2020-21, which the Morrison Government hopefully estimates will fall to 26.2% of GDP in 2024-25.
There is little comfort to be had looking to the state government balance sheets for any fiscal comfort, with ballooning deficits and debt as far as the eye can see with the notable exception of Western Australia, courtesy of the now waning iron ore boom.