The liberal election campaign is, to a large extent, based on the fact that the Rudd-Gillard Government is borrowing $100million every single day. In actual fact if you average out Labor’s budget shortfall over the 1000 or so days it has been in power, the figure is much higher. Currently however it is slowing down and it is forecast to drop away almost completely in 2012-2013.
In the mean time, Australian government debt should reach $150billion by June 2012, and the government will issue bonds to pay for this shortfall in revenue. These bonds will be eagerly sought by superfunds and the public, so the Commonwealth won’t have to pay more than 6% per annum in interest. At that level the Australian government interest bill should be no more than $25m per day, compared to Australian government expenditure of $1000m or $1billion per day (i.e. about 2.5cent in the dollar). This compares with 10p in the pound in the UK and 14c in the US dollar.
When considering the upcoming election, issues on Government debt need to be thrown out the window. Even after Rudd’s stimulus package last year, Government debt should peak at 12.5% of GDP provided total debt can be limited to $150billion.
Comparatively, Australia still has one of the lowest Government debts in the world. England, for instance, has a Government debt equivalent to 62.2% of their GDP (according to the UK Office for National Statistics). The United States is sitting on a national debt of 93% of their GDP (according to the CIA World Fact Book). If America decided they wanted to pull themselves out of debt tomorrow, it would cost each US citizen over US$30,000… every man, woman and child. For an interesting international debt comparison, check out Visual Economics.
It’s a bit embarrassing that debt management even features as a key policy this election. A more pressing issue is private debt, which is around 150% of GDP or 27 times greater than Government debt. The global financial crisis sorted out the private companies that should not have borrowed overseas (e.g. Babcock & Brown, Allco, ABC Learning, Rams home loans), as they all went bankrupt. The majority of companies that borrow overseas have offshore earnings to offset the risk they take on currency movements. So when this is factored in, even private debt levels are not overly concerning. Just as long as the debt is used to add to our income producing stock of capital and not wasted on casinos, or property in the wrong area, or on more coal power stations or other investments that are likely to become redundant with climate change.
On the revenue side Australia’s position is even better by international comparison. Our mineral exports are booming. For example, our iron ore costs around US$20 per tonne to dig up (or scrape off the mountain) and US$10 to ship to China. Spot prices are currently US$150 per tonne. Tax proceeds, even under the scaled down new mineral tax, should boom.
The important thing is that Australia uses this wealth wisely, because once their gone these minerals cannot be replaced. Hopefully, our politicians will invest this once in a century mineral bonus in schools, hospitals, roads and rail infrastructure for the future.
The major political parties sparring over the “national debt issue” is ridiculous. What we should be asking our future leaders is how they plan on spending the money from the minerals boom?
