Oh yes, the dreaded duet, Debt and deficit. It is not a topic that should be addressed during election campaigns, but will be discussed later. Presenting the invoice, remember?
Chalmers is understandably anxious to remind us that our trillion-dollar public debt is inherited from its predecessors. What Kennedy is doing is implicitly confirming that the previous government’s “medium-term fiscal strategy”, “focusing on growing the economy to stabilize and reduce debt” – remains the solution.
Anthony Albanese and the treasurer, Dr. Jim Chalmers, have inherited many problems that will not be solved quickly or easily. Credit: Alex Ellinghausen
With an important post-election rating: “It would be more prudent for the budget to help more over time.”
How? We’ll get to that. But first, he gave the best explanation I’ve seen of how a government can overcome a large debt simply by ensuring that the economy grows at an annual rate faster than the interest rate on the debt.
To “get” the explanation, you have to accept a proposition that many otherwise sensible people and media commentators can’t get right: that the government of a nation is in a radically different position from that of a individual home.
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Households have to pay the money they borrow sooner or later, but governments do not. This is because every family grows old and dies, while nations are a collection of many millions of homes that, even though their faces change, continue forever.
For a nation, what matters is not its ability to pay off debt, but only its ability to pay interest. As long as the nation continues to exist, it can go back into debt by issuing a new good government to replace an old good government as it has to be paid.
Kennedy explained that strong economic growth and interest rates that are low compared to what has been normal over the past 50 years are likely to ease the debt burden. This is done by reducing its size not in terms of dollars, but in relation to the size of the economy, measured by the dollar value of all goods and services that the economy produces annually (nominal gross domestic product) in the coming years.
Interest payments add to the amount of debt the nation has, but economic growth (nominal GDP) increases the economy’s ability to “serve” (pay interest) that debt. “When the economy grows faster than interest payments add to debt, the debt burden will decrease,” he said.
This is the basic mechanism that all governments in all rich countries have relied on since World War II to offset their debt. This is what the Morrison government has relied on, and it will continue to be trusted by the Albanian government.
Election campaigns are a time when we hear about all the wonderful things politicians want to do to improve the public services we get and reduce the taxes we pay. It is after the election that the voters present the bill.
But – with the Treasury there must be a but – there was a weakness in the previous government’s strategy: its projections showed that the budget will continue to be in deficit for the next decade and, in fact, for the next 40 years.
This means that not only the interest bill was added to the debt each year, but also the continuing deficits.
“The current expected reduction in debt [relative] in GDP it is unusual, as it is only based on favorable growth and interest rate dynamics [that the average rate of interest on the debt will rise more slowly that the rising rate of interest on the new borrowing because the average government bond takes about seven years to fall due] to reduce the proportion [of debt to GDP]Kennedy said.
So here’s the post-election But (which, since it’s the same Treasury, would probably have happened even without a change of government): “A more prudent path would be for the budget to help more, over time.” , said Kennedy.
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How? Reducing the budget deficit much faster than the Liberals were thinking. Maybe even with budget surpluses for a while, which would mean paying off some of the debt.
Sure, but how is the deficit reduced? The government will review all spending programs left by the Coalition, looking for savings. But the savings he finds will be used primarily to pay for the new expenses promised by Labor.
Therefore, the main way to improve the budget balance will be to “increase additional tax revenue.” Kennedy hinted that this would be done by reducing tax concessions on businesses and households.
The next three years will be interesting.
Ross Gittins is the economics editor.
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