“At the moment, we are spending over $100 million a day more than we’re collecting in revenue. Now that’s unsustainable, particularly given we’re spending nearly $40 million a day on the interest on the debt that we have.” – Treasurer Joe Hockey, interview with Alison Carabine on RN Breakfast, February 3, 2015.
To get $100 million of “overspending” a day, the Treasurer has relied on the Commonwealth Government fiscal balance recorded in the Mid Year Economic and Fiscal Outlook statement (MYEFO). The MYEFO, released in December mid-way through our financial year, updates the figures from the May Budget – including the deficit.
MYEFO states that the 2014-15 estimated deficit is $40.362 billion. It’s listed in MYEFO as the underlying cash balance.
The estimated deficit is a net fiscal balance for the entire year, so it does not really make sense to think about it on a daily basis. But ignoring that quibble for now, the numbers in Mr Hockey’s statement more or less check out.
In fact, dividing $40.362 billion by 365 and rounding produces a figure of $111 million – even more than the $100 million a day that the Treasurer stated.
That’s up from the estimate of the annual fiscal deficit of $29.8 billion - $80 million a day in the Treasurer’s language - that was in the May Budget.
MYEFO also tells us that the expected 2014‑15 deficit, or underlying cash balance, is 2.5% of GDP.
The interest of $40 million a day also comes from MYEFO. It’s a figure for the interest on Commonwealth government-issued debt, listed in table D7 of that document as $14.2 billion. Divide that by 365 and you get $39 million: Mr Hockey’s “nearly $40 million a day”.
Let’s put it in context: with a population of 23,742,527 as I write, each Australian is “overspending” by $4.66 per day, or just over $1,700 per year. And we’re each paying $1.64 in interest a day on our debt.
What do the numbers mean?
Internationally, we are doing OK. In 2012, the latest year with full comparable figures, all OECD members except for Norway and Germany had an operating fiscal deficit and most of them had a larger deficit than Australia.
What about government debt? This is difficult because there are different measures, including net or gross debt, central or general government debt, or the value of Commonwealth-issued securities.
In 2012, Australia’s gross general government debt (at all levels) was 57% of GDP as recorded by the OECD here. But at the Commonwealth level, the May budget indicated that government debt on issue would have a face value of 23.3% of GDP, while Commonwealth net debt is estimated as 15.2% of GDP in Table 3.4 in MYEFO.
Most other governments had higher gross debt than Australia. Some governments, like Germany, had a fiscal surplus but high debt (89% of GDP in 2012). The UK had debt of 101% of GDP and a deficit of 6% in 2012.
The Commonwealth government is AAA rated. It does not have any problem borrowing.
As the deficit and debt trend up, the credit rating agencies have started to mutter. The agencies, like Moody’s, rely on the value of issued government securities – on this basis, Moody’s states that “consolidated gross general government debt, which includes state and local government debt, is about 32% of GDP, whereas the median for AAA-rated countries is around 45% of GDP”.
On any comparative measure of government debt, we are still ahead of the curve.
How can we fix it?
We don’t need to worry too much, not right now. Partly because, as others have recently explained, the government budget is not like your household budget.
To do that, the government can either cut spending or raise taxes.
Commonwealth government taxes this year are estimated to be $353.6 billion (total revenue is $385.9 billion) but government expenses are over $400 billion. More or less, that is what causes our “overspend”.
Today, our federal taxes are falling. They were estimated at $360 billion in the May budget for 2014-15, or 22.1% of GDP. This is much lower than a decade ago: under the Howard government, federal tax receipts reached 30.4% of GDP. And tax revenues are predicted to decline further in MYEFO, by several billions, because of lower commodity prices and because your wages are not growing as fast as before. The GST raises only a small percentage of GDP in revenue and revenue growth is slowing.
In the May 2014-15 budget, the government proposed to cut expenditures including unemployment benefits and the age pension, and raise fees for doctors and universities. The government claims that $10.6 billion in budget savings have not been enacted because of the Senate’s refusal to pass these unpopular budget measures.
We could collect more taxes, if we choose, to fund public goods, redistribution and services.
It is true we are spending over $100 million a day more than we’re collecting in revenue and nearly $40 million a day on the interest on the debt. However, we compare favourably to other countries on deficit and debt.
You don’t need to worry too much right now about your $4.66 a day in “overspend”. But you do need to join a debate about tax reform that asks what you want government to do, how we can reform taxes to ensure prosperity, and how we can fund public goods fairly and sustainably for the future.
The article has verified the statement made by Treasurer Joe Hockey, and put Australia’s budget problem in per capita terms. Each Australian is overspending by $4.66 per day of which $1.64 is to service the debt.
The article also notes that Australia’s budget problem is not dire, although there is some concern that the problem is structural. The verdict deserves support - we need to discuss the prospect of raising taxes and/or cutting government expenditures in a framework that considers the long-term implications for growth, employment and income inequality. Economic sustainability requires an understanding of key economic rates (the interest rate, exchange rate, growth rate and the inflation rate) but let us not forget that changes to taxes and government expenditures also have implications for welfare and equity. – Guay Lim
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