Tuesday, 20 December 2011

Peter Costello Speaks With Forked Tongue

Correction: The text below has been corrected to show that the peak tax to GDP ratio in 2004-05 and again in 2005-06 under the Howard government was 24.2%, not 24.1% as originally published. The text below is now correct. SK


Today’s Op Ed in the SMH and The Age from former Treasurer and Deputy Liberal Leader, Peter Costello outlines some very valid issues concerning the importance of sound public sector finances and in particular, the problems poorly managed fiscal settings deliver. Costello rightly cites the woes of many economies in the euro zone as evidence of poor economic management.

But that’s about as useful as his piece gets.

Costello suggests, without specifying the date that:

  • Once upon a time we could have shared our experience at managing and eliminating public debt. We could have shared our experience on how to halt a ratings downgrade and restore a sovereign credit rating to triple-A.”

Why the so-called sharing of “our experience” is no longer valid is not specified by Costello. He implies it is due to the factually flawed assertion of “bigger government and bigger borrowing”.

There are also some inconvenient facts that undermine Costello’s commentary. Never once during the Howard government during which Costello was Treasurer for the whole time did Australia achieve the triple-A credit rating from all major credit rating agencies. With Fitch moving Australia to triple-A last month, Australia for the first time ever has the trifecta of triple-A from all three agencies. This is a truly magnificent endorsement of Australia’s economic position and management over many years so little wonder Treasurer Swan was Euromoney’s Treasurer of the Year.

Costello was never Treasurer of the Year and after the worthy tax reforms associated with the introduction of (the watered down) GST, he sat back while the asset price and mining booms saw his period as Treasurer reap the highest tax to GDP ratio ever recorded in Australia’s modern history at 24.2%. In 2010-11, this ratio was at multi-decade lows of 20.0%. Is this how he suggests the Europeans should fix their fiscal problems? Boost the tax to GDP ratio to record highs?

In terms of “bigger borrowing”, it was the Howard government via Costello that maintained a market for Commonwealth Government bonds after serious consideration was given to eliminating it. Fair enough too. This meant (rightly so) that Australia would always have public sector gross debt into the tens or hundreds of billions of dollars. Costello chose to maintain and build up gross debt – ie, government borrowing. The Gillard government has reiterated that objective for the bond market and after consultation with stakeholders, including the RBA and Treasury as well as major market participants, and also in reaction to the Basel III requirements for banking regulation, the Gillard government will maintain the bond market at around 12-14% of GDP into the distant future. In other words, the gross debt to GDP will, for ever more, be around 12 - 14% of GDP. This is sensible, prudent and savvy policy.

It is also worth looking at what Costello said in 1999, shortly after the Budget and in reaction to a ratings upgrade for Australia from Standard & Poors.

He quite rightly said:

  • · This is a recognition by an international ratings agency of the strength of the Government’s budget policy. As the ratings agency announced, it’s a consequence of good economic policy and it means that Australia is again being regarded internationally as a very strong economy”

He went on:

  • · It also means that Australian companies will find it easier to borrow at lower rates. It will be good for economic growth and that will be good for jobs in Australia…it’s a consequence of long, hard, good economic work by this Government and it shows the benefits that economic reform will have.”

Costello does not use such words now even though Australia’s sovereign rating is now better than back then and better than at any time in history, including the 11 and a half years he was Treasurer.

Finally, it is important to note that the Howard government never had an objective for the budget to be in surplus. On the contrary - in the 1996 Charter of Budget Honesty, the Howard government objective for the Budget was “to maintain budget balance, on average, over the course of the economic cycle.” No mention of surplus. The “balance on average” means that an occasional surplus would be met with an occasional deficit – which is exactly how fiscal policy should be run when there is a business cycle to contend with.

Costello’s hollow words do not stack up against his record as Treasurer or the management of the business cycle during and after the GFC.

The Peter Costello article is here:



  1. Um, Stephen, couuld you please run for a seat in parliament standing for the ALP? So that, you could be Treasurer and Dr Andrew Leigh could be your Finance Minister. That would be Economic Nirvana for this country!

  2. Flattering HillbillySkeleton, but I prefer my day job... and Andrew would likely to be Treasurer one day! Cheers

  3. Costello eliminated Commonwealth net debt of $96 billion. Labor under Swan has cranked it up by so much that the Keating debt legacy looks modest by comparison. Your comments are about gross debt are deliberately misleading; net debt is the true indication of the health of the balance sheet. Take off your rose (or pink) coloured glasses, Stephen.

  4. Malvern Libs - Net debt will be peaking under 9% of GDP after the most amazing economic bailout seen during the GFC. It meant Australia was one of very few countries not to record a recession. Compare that level of net debt with the US (85%), eurozone (68%) or just about any other country. Not sure what the complaint is, but it is Mr Costello who is airbrushing history and is too mean to acknowledge how structurally sound the economy is right now, more than 4 years after he lost office. Cheers

  5. Didnt Peter wipe 96 billion dollars off the Hawke/Keating debt.. Left a 22 billion surplus and has now watched Labor dwindle it down to 50 Billion dollars in the red...

  6. Hardliner - it is true that Costello moved public finances to a net asset position (negative debt if you like), but few - including him - know that he did it with the highest tax take ever recorded. It is easy to pay off debt if you take the tripe out of the population. The Labor deficit is due to the tax take in 2010-11 being 4.1% of GDP lower than the peak Costello tax take. Did you notice thew GFC? That's $55 billion in one year in today's dollars. There's the surplus if you want to pay more tax! Cheers

  7. If there's no net debt, none of us have any money in our pockets and if we do it is because we're in personal debt.

  8. Hardliner - >$30B of that debt was paid off by selling Telstra alone. This was one of many questionably-managed asset sales made by Howard/Costello during their government. It's easy to pay off the mortgage when you sell the house to do so.

  9. As Damien Miller says - much of the $96 billion of debt that was "paid off" via selling off assets - Telstra, RBA gold, and if I recall correctly, airports and some other items. This merely transferred the debt from public to private hands - net effect zero.