Yesterday Mr Morrison forthrightly gave a guarantee to Australia he would not increase taxes; a guarantee which is not even worth the money it’s written on. Walt Disney’s charming film ‘Dumbo’ comes to mind whenever I think about Morrison’s so-called guarantee, “Because I thought I had heard everything until I heard Morrison told another lie.”
We are now carrying a net national debt of $912B, and this was the same Liberal/ National Party Morrison Government which proclaimed just before the 2019 Federal Election, “Australia we are Back in Black.” I understand the coffee mugs which Parliament House was selling to push this propaganda ‘of Back in Black’ onto us are still selling cheaply at about 5 cents a mug, which is more than Mr Morrison’s Guarantee is worth.
To explain some of the terms in this article I shall explain them out:
- AGS is Australian Government Securities.
- GDP stands for gross domestic product, and it is the monetary value of all finished goods and services made within a country during a specific period. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
- Interest on the national debt is how much the federal government must pay on outstanding public debt each year.
- MYFEO is Mid-Year Economic and Fiscal Outlook.
- National debt includes debt owed to individuals, to businesses, and to foreign central banks, as well as intragovernmental holdings.
- Net debt is the sum of all financial liabilities (gross debt) of a government less its respective financial assets.
Not long before Mr Frydenberg delivered the Morrison Government’s 2022-23 Federal Budget, a paper was written by Robert Carling for The Centre For Independent Studies (CIS) titled “A sea of red: Tracking Australia’s debt iceberg.”
Mr Carling’s review of our net national debt (not gross), which currently sits at an eyewatering $912Billion, is he forecasts an increase in debt of $3.8Billion to 2024-25, and there being an increased level risk, drag on the economy and risks of crowding out some Govt services. In his introduction, Mr Carling opines that:
“… the increase in debt raises economic policy issues of major concern. It is reducing fiscal flexibility and the capacity of governments to respond effectively to future crises. It may also act as a drag on economic growth in the longer term. There is no prospect of debt being paid down as it was in the decade up to 2007. This would require budget surpluses and/or large privatisations of public enterprises – neither of which is likely. To the contrary, the outlook is for continuing structural budget deficits and there are fewer opportunities for privatisations, with none of substantial scale on governments’ agendas. The best that can be expected is that the debt burden will be gradually eroded relative to GDP as the economy grows. However, this will require interest rates on government bonds to remain below the economic growth rate. It will also require fiscal discipline that places budget deficits on a path to elimination over the next several years. This is the key lesson for the coming round of federal and state/territory budgets, and in particular a warning that expenditure restraint needs to be exercised.”
On page 2 of his report, Mr Carling states:
“… general government net debt – the measure most often used to gauge the debt burden – is estimated to reach 53% of GDP in 2024/25, up from 22% in 2018/19.” 53% of GDP by 2024-25.”
On page 7 Mr Carling discusses our net national debt in these terms:
“Such a large increase in indebtedness as is now under way cannot occur without consequences. At the very least, it raises the nation’s economic risk profile. It leaves Australia more vulnerable to future adverse shocks. More tangible is the drag on economic growth and the loss of public policy opportunities that would otherwise have been available. The impact of a public debt burden on economic growth is a controversial issue among economists. Large deficits may be stimulatory in the short-term, but the resulting debt may also act as a drag on economic growth in the medium to long term. However, there is much dispute about the level of debt at which a negative impact on growth begins to be felt. Debt will restrict future fiscal flexibility. Future tax cuts will have to be foregone or taxes increased. While there will be a welcome increase in discipline on governments to avoid wasteful spending, fiscal pressure will also crowd out beneficial new spending, including on infrastructure (emphasis added). Once the current crisis passes and governments focus – as they inevitably must – on budget repair, this task will be a distraction from the equally important challenge of implementing reforms to strengthen productivity growth. We can therefore say that looking at the Commonwealth and states in aggregate, general government net debt on current estimates will increase from 22% of GDP in 2019 to 53% in 2025.”
Mr Carling’s sources of information are based on International Monetary Fund reports, State and Commonwealth budgets, including Mid-Year Economic and Fiscal Outlooks. Mr Carling’s experience and published works are set out on the final page of his report.
Now I kindly ask you to view pages 192 to 198 of the 2022-23 Budget papers (Budget), which address the issue of net national debt.
It’s evident the Morrison Government in presenting this Budget are planning on a ‘plain sailing’ outlook, which does not address properly interest rate rises arising from the runaway inflation which the World and Australia will experience for several months to come. On page 193 the Morrison Government says in its overview of national debt:
“Net debt is expected to be 31.1 per cent of GDP at 30 June 2023 before stabilising at 33.1 per cent of GDP at the end of forward estimates and falling to 26.9 per cent of GDP by the end of the medium term. Interest payments on AGS as a share of GDP are expected to remain broadly consistent with estimates at MYEFO and around long-run average levels.“
I then kindly ask you to view page 194 of the Budget, as the Morrison Government says:
“Net debt is expected to be lower than estimated at MYEFO across all years of the forward estimates. This primarily reflects the Government’s decreased borrowing requirement resulting from the expected improvement in the underlying cash balance, and a decrease in the market value of AGS due to higher yields than were assumed at MYEFO.”
There are a lot of ifs and assumptions in that opinion.
If you would then please turn to page 196 of the Budget as the Morrison Government proceeds to say:
“Interest payments as a share of GDP are expected to remain broadly consistent with estimates at MYEFO over the forward estimates, with the expected impact of the recent rise in interest rates partially offset by lower issuance of AGS. By the end of the medium term, interest payments as a share of GDP are projected to be lower than projected at MYEFO, as assumed higher interest rates are more than offset by the expected lower issuance of AGS. Interest payments as a share of the economy are expected to remain around the 30-year average of just under one per cent through the forward estimates.”
Also on page 196 of the Budget is a table numbered 6.9 in which it records interest payments, interest receipts and net interest payments.
One of the political and economics journalists at The Sydney Morning Herald (The SMH), Shane Wright, wrote an opinion piece about the Budget; “Debt grows, deficits continue despite $300b boost to economy” which was published by the SMH on 29 March 2022. Mr Wright held the following opinions about the Budget:
1 The Budget is forecast to show a $78Billion deficit for the 2022-23 financial year after a $79.8Billion shortfall in the current year.
2 Although being down on what was forecast in 2021-22, the deficits are still among the four largest deficits on record.
3 Gross debt is still expected to break the trillion-dollar mark in 2023-24 and hit $1.2Trillion by 2025.
4 Higher interest rates are also starting to bite into the Budget.
5 Whilst tax receipts for iron ore and coal prices remain at current levels until the end of the September quarter, tax receipts are likely to be $30Billion over four years better than forecast by Mr Frydenberg. Whilst that may improve the deficit, the federal government would also face higher costs linked to inflation and borrowing costs.
6 Treasury also notes a possible risk to the budget if China’s economy slows more quickly than expected due to another Covid outbreak, which would drive down the price of key commodities.
However, AMP in their article about the Budget expressed the view that:
1 At a micro level, the Budget may be criticised on the grounds that:
- The temporary fuel excise reduction is bad economic policy in that: it may be very hard to reverse if oil prices keep rising or stay high; it will make no sense if oil prices fall back on say a Ukraine peace deal; and it sets a bad precedent.
- Many welfare recipients are arguably getting compensated for “cost of living” pressures twice – via the one of payment and via the indexation of payments to inflation.
- The housing measures continue to focus more on demand than supply which will result in higher than otherwise home prices (even though they are unlikely to prevent the cyclical downturn in prices now starting) and will boost debt levels.
2 At a macro level there are two big risks flowing from the Budget as:
- Firstly, the pre-election cash splash (which is about 1% of GDP in terms of new stimulus in the Budget for this calendar year, but is actually a bit more if spending of the $16bn in “decisions taken but not yet announced” in MYEFO are allowed for) risks overstimulating the economy at a time when it is already strong, further adding to inflationary pressures and adding to the amount by which the RBA will have to hike interest rates.
- Secondly, the reliance on growing the economy to reduce the budget deficit and debt is unlikely to reduce debt quickly enough and is dependent on interest rates remaining low relative to economic growth. 10-year bond yields have already gone up more than four-fold since their 2020 low warning of a sharp increase in debt interest payments beyond the medium term. And economic growth is unlikely to be anywhere near strong enough to reduce the debt burden as it did in the post-WW2 period unless there is another immigration boom or 1980s style focus on boosting productivity – both of which look unlikely. In the meantime, the strategy would be highly vulnerable if anything came along to curtail the commodity boom. So, at some point, tough decisions are likely to be required either to reduce spending as a share of GDP or raise taxes.
It is evident the opinions on risk factors expressed by Mr Carling and AMP are strong regarding the Budget and national net debt levels, including the forward projections. There is a shared opinion between Mr Carling and AMP regarding the net national debt, namely reduce spending (goodbye Medicare, Aged Care and Education) or raise taxes, but Mr Morrison you can’t raise taxes as you gave us your guarantee! If the fairies at the bottom of the garden tell you every single item of economic, social, and international events will remain the same for the next three years, well then, you will be severely disappointed with those fairies about the economic opinions herein. What does this mean? Well, firstly it means Mr Morrison’s “tax guarantee” is a bucket of lies, unless he cuts spending on health, aged care, and education, or raises taxes. Secondly, it’s further evidence Mr Morrison and the rest of the Morrison Government are not fit to lead this country.
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