There is no better evidence that Australia is living beyond its means than the growth in government debt over the last two decades.
OECD data reveals that of all the world’s developed nations, Australia’s debt has multiplied more quickly than anywhere else.
The good news is that we started from a low base. Gross public debt was just 15 per cent of GDP back in 2004. Today it’s nearly 60 per cent.
That’s a four-fold increase in 20 years, a more rapid rise in debt that any other OECD nation.
The Howard government can at least take pride in the low level of debt it passed on when defeated at the 2007 election. They achieved this by paying down debt and building a Future Fund to the point where Australia’s net debt was almost zero when Kevin Rudd and Labor took over in 2007.
What has happened since that time speaks to the extent to which Australia is living beyond its means, and the worst part is that no government has sought to reform the economy during that time either. Or when they have tried, they have been thwarted and abandoned its efforts.
It has meant that our tax and spending settings at the moment are only going to make a bad situation even worse in the coming years.
We know that the next week’s federal budget will be covered in red ink, with deficits forecast for the next four years. Let’s not forget the billions of dollars set aside for election spending announcements that will only add to the national debt.
A recent opinion poll revealing that more than 80 per cent of Australians are in favour of even more spending as a cost-of-living support, the political will to tighten the financial screws and get on top of the debt blowout just isn’t there, writes Peter van Onselen
The Albanese government handed down two budget surpluses during its term in office, but they will be dwarfed by the size of the debt they are now projecting across the next four years.
And with a recent opinion poll revealing that more than 80 per cent of Australians are in favour of even more spending as cost-of-living support, the political will to tighten the financial screws and get on top of the debt blowout just isn’t there.
The message within the OECD data is that both major parties are to blame. This isn’t a case of one side of politics doing the damage, both have.
Of course there are excuses for the blowouts. We spent up big during the global financial crisis to ward off a recession. We spent even more during the pandemic to keep businesses open as well as save jobs.
These were challenges the entire global community faced, yet Australia multiplied its debt faster than anywhere else.
While both sides of politics are proud of new spending within policy initiatives such as the NDIS, it is contributing to the debt problem. NDIS spending is forecast to accelerate over the coming years. In fact the combination of welfare state provisions and the ageing population is causing spending blowouts right across the spectrum.
If debt can’t be reined in, or at least its growth trajectory slowed, eventually governments will be forced to limit spending or increase taxes, or both.
Economics 101 tells you that no nation can tax its way to prosperity. Simply inflating taxes in an attempt to pay down debt stifles working and investment incentives. In a globalised world it can send investors overseas, and it can also lead to a brain drain if income taxes become prohibitively high and our best and brightest move abroad.
The alternative to increasing taxes is decreasing spending, but in which areas? Australians have become reliant (and expectant) on more and more government services
Australian income tax rates are already some of the highest in the world, with no sign that this year’s budget will address further bracket creep in what remains a high inflation environment, with fresh forecasts that inflation might start rising again.
The alternative to increasing taxes is decreasing spending, but in which areas? Australians have become reliant (and expectant) on more and more government services. If these services suddenly start to be defunded or taken away altogether there could well be a political backlash against the government of the day doing it.
As we count down to an election don’t expect to see much done by either major party to significantly curb spending.
One factor that has certainly contributed to spiralling debt levels is the Senate. Minor parties rarely block new spending but they frequently block any government attempt to cut spending. And third parties are becoming increasingly good at wedging major parties that start to discuss reforms that just might result in some sections of the community losing out.
Once upon a time minor parties that controlled the balance of power in the Senate took the view that their role was to ‘keep the bastards honest’ as the Australian Democrats slogan said, rather than simply acting as a blocking agent.
But today, parties like the Greens pander to their narrow sectional base purely to retain power and influence. They rarely compromise, again stifling the ability to get anything done that doesn’t fall within their narrow ideological world view.
One that is unrepresentative of the wider electorate.
Former head of the Department of Prime Minister and Cabinet, respected former senior bureaucrat Martin Parkinson, has slammed the lack of serious reforms in recent years, especially concerning the taxation system.
It was former PM Paul Keating who would talk about the importance of ‘growing the pie’ when he was in office, which essentially refers to a country recording strong economic growth as a means of offsetting rising debt
Such reforms are an important way to update antiquated methodologies in how government’s collect tax, how they incentivise investing and help lift productivity in the process.
It was former PM Paul Keating who would talk about the importance of ‘growing the pie’ when he was in office, which essentially refers to a country recording strong economic growth as a means of offsetting rising debt.
Put simply, if an economy is fast growing debt levels reduce as a percentage of GDP, because the nation’s GDP is growing at a rapid rate.
One of the reasons Australia’s living standards are declining is because growth is anaemic despite high inflation.
While Australian debt to GDP levels remain relatively low amongst many OECD countries, the fact they are escalating more quickly than anywhere else is a sure sign change is needed.
Perhaps the biggest worry is the potential economic catastrophe of government debt continuing to rise in conjunction with private debt.
As citizens we have some of the highest per capita private debt anywhere in the world, and this is another reason why inflation has been so difficult for Australians to live with.
The OECD’s wake up call needs to be heeded. Perhaps we can have a serious debate about precisely how to do that once we get the election campaign out of the way.
It should be a debate for a campaign, of course, but that’s unrealistic.
In its aftermath, however, just maybe both major parties can agree that we need another era of significant reform. It should start with a tax summit, like the one Bob Hawke initiated back in 1984.
Despite the heady debates of the 1980s, the hallmark of the reforms was a degree of bipartisanship built on a mutual understanding that without it Australia would go backwards.
Such cooperative sentiments have been thin on the ground ever since.
