Running on empty
Labor and the Coalition have both drained our coffers
2 September 2022
Although in office for a little more than 100 days, Treasurer Jim Chalmers has already been criticised in some quarters for laying blame for Australia’s economic troubles at the feet of the former Coalition government. He is not entirely wrong to do so.
The period the Coalition was in office, even allowing for pandemic-related spending, could hardly be characterised as the golden years of fiscal restraint. Nor too, could the Rudd-Gillard-Rudd years in which Chalmers was Wayne Swan’s chief of staff.
Examples are growing daily of where rising inflation and interest rates are already causing serious stress for mortgage holders throughout the country. Worse still, the pain for households will only be multiplied when energy bills rising rapidly thanks to net zero are also factored in.
But the federal government, which has run up close to $1 trillion debt since the Howard years, is perhaps most exposed. It naturally follows, as rates go up, so too will the borrowing cost on debt, both for new debt accrued and existing debt being rolled over.
Recently, Chalmers correctly identified, ‘when interest rates are rising, it actually costs more and more to service that debt…the fastest-growing area of government spending in the budget is actually servicing the debt that we’ve inherited because as interest rates rise, it becomes more expensive to pay that back.’
With Treasury revising its inflation rate estimate to 7.75 per cent, the RBA cash rate has nowhere to go but up, and fast. As the cash rate has typically followed the inflation rate, Australia faces dramatic rises in our government debt servicing costs.
Recent research released by the Institute of Public Affairs identified the scale of the challenge. Should the cash rate rise to 7 per cent by 2030, a fair assumption given current inflation trajectory, it is estimated that the annual cost of the nation’s interest bill would more than quadruple from $20 billion today to $89 billion by 2030.
This will make the annual cost of debt servicing the third largest spending item in the federal budget behind only welfare and social services, and health.
By way of context, this would see our nation’s debt servicing cost exceed double that of current annual federal government spending on defence and is the equivalent to the cost of purchasing a fleet of six new nuclear submarines. It is also three times more than the current NDIS budget.
Moreover, approximately half of all federal government debt is held overseas, including by the Chinese government, providing potential adversaries with not insignificant financial and economic leverage.
Aside from the Abbott government’s first budget in 2014, which made a strong start on the politically difficult task of budget repair, the former Coalition government oversaw a substantial deterioration to the federal government’s balance sheet.
Under the Coalition, gross federal debt more than doubled from $420 billion in 2015 to $980 billion today, taking debt from 25 per cent of GDP to approximately 45 per cent. This is more than the peak of government debt piled up by Whitlam, which reached just over 20 per cent of GDP in 1975.
Yes, it is true that much of this debt was run up as a result of the pandemic. And it is also true that the Morrison government did not choose for the pandemic to happen. But it did choose how to respond to it.
It was forgivable, and perhaps inevitable, that there be a wage subsidy program like JobKeeper. What was not forgivable is how it was administered. The program was based on giving eligible businesses a wage subsidy of $750 per week per employee, regardless of if that employee was working full time or part time. A more fiscally disciplined approach would have been to at least provide a smaller payment for those working part-time, as occurred in New Zealand.
It was also unclear why the Morrison government chose to direct billions of dollars in taxpayers’ money to states that kept locking its citizens down, especially Victoria, other than they thought it would be popular or, at the very least, politically expedient.
At no time did the Morrison government think it was wise to administer the tough love needed to ween states off soul-destroying lockdowns by refusing to subsidise them.
Yet, at no point did any senior federal Coalition figure even attempt to provide leadership through using the considerable resources of government to communicate the significant economic and social costs of lockdowns.
It is an open question as to whether Labor would have done any better, recent history suggests they more than likely would not have.
When John Howard left office in 2007 gross debt was just $55 billion, which was less than five per cent of GDP. By the time Labor left office in 2013, debt had increased six-fold to approximately $300 billion.
Worse still, both the Gillard and Rudd governments left several budget time-bombs by committing to extra spending outside of the budget forward estimates, which meant the true state of the financial situation was hidden from voters until it was too late.
There is no way around it – any government wanting to pay down debt must cut spending.
This great political challenge is exacerbated by the fact that there is never any shortage of sectional interests demanding more government money from Canberra.
And it is always easier for ministers, who these days seem to be there for a good time, not a long time, to appease those interests by giving into their demands. Whether Chalmers will be a Treasurer more like Keating/Costello than Crean/Morrison remains to be seen.
Still, credit where it is due. So far Chalmers is making the right noises on fiscal discipline and has shown he is perhaps willing to take unpopular decisions in the name of strengthening the budget bottom line, which he did by recently ruling out an extension to the petrol excise cut.
Let’s hope his ambition does not run out of fuel.
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Daniel Wild is Deputy Executive Director at the Institute of Public Affairs