From an economic perspective, I’m actually scared about the prospect of a Coalition government after 2013 with Joe Hockey as Treasurer. The unrelenting display of ignorance on basic economic and market issues should be enough to scare away international investors and undermine decades of great economic management.
Today’s article in The Australian from Mr Hockey is reproduced in full at the end of this post.
On the topic of gross government debt, I wrote this a few weeks ago - http://stephenkoukoulas.blogspot.com/2011/11/gross-debt-gross-ignorance.html - as a primer for what will be an important plank in the longer run financial well-being of Australia – whomever is in government. Critical to the long run economic performance of Australia will be maintaining a deep and liquid market for bonds (Commonwealth Government Securities or CGS). This means that with the decision to maintain a stable level for the bond market (gross debt) as a percentage of GDP, gross debt will rise for ever in dollar terms.
This is the first obvious misunderstanding of a very basis principle from Mr Hockey.
Hockey is so perplexed by the issue that he says:
- “Gross debt continues to rise in every year of the forward estimates with no end in sight.”
Yes it will and that is a good thing. Mr Hockey, that is because the economy is getting bigger every year in the forward estimates with no end in sight.
No where does Mr Hockey mention the need for additional CGS as a global requirement from the new Basel III banking rules. Either he doen’t know about those rules or he willfully ignores them in an effort to make a cheap but illogical point. Either way, it is a sign of concern from the man who is the alternative Treasurer.
The Gillard Government successfully negotiated an exemption from the strict interpretation of the Basel III rules otherwise gross debt would have had to increase to more than half a trillion dollars! As it is, the amount of gross debt is tiny on any measure.
Mr Hockey, in other places, lauds the government for supporting banking competition by having the Australian Office of Financial Management (AOFM) buy Residential Mortgage Backed Securities (RMBS). This initiative involves the Government through the AOFM buying up to $20 billion of RBMS. In broad terms, these transactions add zero to net debt (the Government holds bonds issued by the smaller banks), but boosts gross debt by up to that $20 billion as it needs to raise money to buy them.
Mr Hockey again did not mention that some of the rise in gross debt is simply the result of prudent, sensible management of the economy and the nation’s finances through participation in the RMBS market, when that market failed during the GFC.
I wont rehash the other points about gross debt, other than to suggest Mr Hockey and others re-read my piece referred to above.
There is an obligation on The Australia or indeed Bloomberg, Reuters, Dow Jones, the AFR, Business Spectator or any other group with an interest in this issue to do a survey market economists, regulators and if possible the RBA and Treasury to get their take on Mr Hockey’s and the Coalition’s threat to block the rise in the gross debt ceiling.
I can’t preempt what they would find, but I’d be shocked if the findings weren’t a humiliation for Mr Hockey and his understanding of how to manage gross debt the Australian bond market. Blocking the legislation that allows for a rise in the government’s debt ceiling risks sparking a flight of capital from Australia (as we saw in the US earlier this year when Congress threatened to block the rise in the debt ceiling there) with consequences for the stock market, interest rates and the Australian dollar.
Our gross debt keeps growing
BY: JOE HOCKEY From: The Australian December 23, 2011 12:00AM
THE Gillard government is maxing out Australia's credit card much more quickly than it would have us believe and it's what it is not telling us that makes the situation even more serious.
The government is keeping major programs "off budget" so they have no impact on the underlying budget balance. These include $50 billion for the National Broadband Network and $10bn for the Clean Energy Finance Corporation, or "Gillard Bank".
The impact of these programs on overall government borrowing is shown in gross securities on issue. This is forecast to rise to a massive $272.4bn market value in June 2015.
Gross debt continues to rise in every year of the forward estimates with no end in sight. On top of this, the government has failed to explain how it plans to pay for several of its other commitments, such as its talk about a national dental scheme and the $6.5bn a year for a national disability insurance scheme. The Coalition fully supports doing whatever is possible to help people with a disability, but this spending has not been included in the projections of budget spending or debt. These additional commitments will substantially lift spending and debt.
There is now an increasing likelihood the government will need to again lift the legislated limit of $250bn on commonwealth securities on issue.
Although the Coalition has supported this in the past, the government should not expect a rubber stamp.
In a few years, Labor has increased its limit from $75bn to $200bn and, in May, to $250bn. Any proposal to lift the debt limit further should be assessed against five tough criteria.
First, all significant spending proposals must be subject to a cost-benefit analysis. It is shameful the $50bn government-owned monopoly NBN hasn't had a cost-benefit study, as recommended by the Productivity Commission.
Second, new spending proposals should be funded from savings in existing programs. Cancelling the carbon and mining taxes and associated expenditure would deliver substantial savings to the budget bottom line and would be a good place to start.
Third, the government must commit to a credible strategy for paying down debt across the medium term. Without further detail, the government's projection to reduce net debt to zero by 2020-21 is hardly believable, coming from a Treasurer who this year will chalk up his fourth huge deficit out of four budgets. It would require six consecutive annual reductions in net debt of $22bn. That is six consecutive surpluses larger in dollar terms than has been achieved previously (the largest underlying surplus was the $19.7bn achieved by the Coalition in 2007-08) or very solid growth in financial assets, which seems problematic given the likely continued financial and market volatility across the medium term.
Fourth, the government must publish key financial data for the medium to long term to enable proper scrutiny of its spending and debt. These should include total government expenditure, including spending for long-term projects that are presently classified "off budget", such as the NBN and Gillard Bank, and expected spending for proposals such as the NDIS. This additional information must also include securities on issue and gross government liabilities. This will provide for a more accurate picture of the spending undertaken by this government, particularly in those instances where much of this spending is to occur beyond the forward estimates and it will provide some assurance about the medium-term debt repayment strategy.
Finally, as I called for in my post-budget speech, the government should publish estimates of the structural budget position. A budget that is in structural balance across the cycle ensures surpluses in the good times to offset deficits in the tough times.
Unfortunately this government is running a deep structural budget deficit, with a $37bn headline deficit at a time of record high terms of trade and the labour market close to fully employed.
These are the criteria the government must address if it wishes to seek an increase in the $250bn debt limit.The lesson from Europe, Japan and the US is that countries must live within their means.
Joe Hockey is the shadow treasurer.