Australian public sector debt is presently unsustainable, with governments flouting sound practices by accumulating debt for handouts.
One of the 2015-16 federal budget's most important features was its projection of a deteriorating government balance sheet due to rising public debt levels. The figures speak for themselves: gross debt (or the face value of government securities on issue) are projected to increase from about $460 billion (27.8 per cent of GDP) at the end of 2015-16 to about $565 billion (29.2 per cent) by the end of 2018-19. After taking into account assets – such as cash, advances and investments – held by the Commonwealth, net debt will rise over the same period from about $286 billion to about $325 billion.
There are divergent perspectives within the contemporary public policy debate concerning whether our existing public debt levels are problematic from economic and financial management perspectives. For some commentators, that levels of Australian public indebtedness are much lower than in other OECD economies – such as Greece, weighed down with debt equivalent to about 177 per cent of GDP – implies that there is definitely no debt problem, today or in the future.
Within the upper echelons of the Australian Public Service, it appears that key bureaucrats have assumed a nuanced interpretation of the matter, suggesting there is no problem now but that matters could worsen tomorrow without serious policy change. In his first main speech as Treasury secretary, John Fraser said "government debt is not at crisis levels" but cautioned that "no action to stem the growth of government debt and/or any substantial rise in interest rates threatens to make net debt a bigger issue in future".
Similarly, Finance Department secretary Jane Halton, said that "to continue with persistent budget deficits would mean growing levels of public debt and increasing levels of debt interest payments". In a speech to the Committee for Economic Development of Australia, she emphasised the budgetary policy imperative to restrain spending growth "to ensure fiscal sustainability over the medium term".
Yet the notion that current Australian public sector debt levels are sustainable is refuted by new research by the Institute of Public Affairs. At its most basic level, the sustainability of public debt is influenced by various factors, including previous borrowing patterns, levels of interest repayments, the state of the budget (less interest repayments), and the economy's growth rate.
Taking these factors into account, the actual Commonwealth budget balance in 2013-14, a deficit of about 1.4 per cent of GDP, was worse than the budget balance (a surplus of about 0.1 per cent of GDP) necessary to merely stabilise the debt-to-GDP ratio in the longer term.
Separate analysis has shown that the parlous state of state and local government budgets, accompanied by insufficient growth in the broader economy, means governments lack the fiscal reserves needed to return public debt back to a stable growth trajectory. This means the interest bill on public debts is also likely to keep growing, depriving taxpayers of more valuable public services and reducing the discretion of policymakers to change budget settings as circumstances change.
In the simplest of terms, what the institute's analysis illustrates is that the debt burden is not unsustainable in a decade, or by mid-century, as population ageing adds to spending pressures on government budgets, but is unsustainable right now given our budget settings and economic conditions.
Another problem with the existing debt load accumulated by federal government, not to mention the state and local public sectors, is that it is used partly to finance recurrent government consumption and transfer spending.
Government finance data issued by the Australian Bureau of Statistics in May this year shows that new cash borrowings by the Commonwealth general government sector greatly exceeded investment spending from the period 2008-09, during the peak of the global financial crisis, to the latest available figures for 2013-14. The institute estimates that if Commonwealth investment spending was fully financed by the new borrowing, there might have been an extra $129 billion in spending on the likes of roads, bridges, schools and hospitals during that period.
The federal budget papers alone spell out that, during this financial year, recurrent spending will account for about 92 per cent of Commonwealth general government spending, with capital spending accounting for the paltry 8 per cent of spending commitments remaining.
That most federal general government spending is on consumption and transfers implies that the top-quality balance sheet maintained during the Howard years has been subsequently raided by acts of profligate borrowing for some forms of spending of questionable economic value.
Corroborating this statement is that, indeed, during the height of the global financial crisis, the government issued a "smoking-gun" statement about the underlying rationale for the debt boom. The statement, issued in February 2009, said, "the overwhelming majority of the increase in net debt is due to the collapse in tax receipts resulting from the deteriorating global economic outlook and the unwinding of the commodities boom".
Flouting the "golden rule" of debt management – that governments borrow only to fund genuinely value-added investment spending – will only cause us serious economic problems down the track, as future generations shoulder the burden of repaying debt for handouts failing to catalyse growth.
Public debt is a problem, and the best way to fix it is through resolute reform action by all governments focussed on a mix of spending restraint, privatisation, deregulation to engender inclusive growth, and more resilient fiscal rule settings. There is simply no alternative to transition out of our severely damaging debt dynamic but to curtail the size of government in Australia.
Mikayla Novak is a senior researcher with the Institute of Public Affairs and the author of Canberra's Debt Problem: Where's the Money Gone?