Why Abbott is scared to debate the economy

July 10, 2013

By Stephen Koukoulas

Prime Minister Kevin Rudd is hoping to debate Opposition Leader Tony Abbott at the National Press Club on the economy this Thursday, although it appears that Mr Abbott will be a no-show.

This is odd given that just recently Mr Abbott described the Federal Government’s fiscal policy and budget as “an emergency”.

One would have thought that in the circumstances it would have been a great opportunity for Mr Abbott to slam the Government over its “reckless spending”; “record” or “skyrocketing” debt; “addiction to tax”; government “waste”; and its “spending like a drunken sailor”.

If there was a semblance of truth in Mr Abbott’s claims, Mr Rudd would surely have been humiliated.

But as the following shows, Mr Abbott might actually be wise in refusing to front up to the debate, because there is little or no substance behind his claims on the budget and government debt.

In any event, it might be worth having a primer for those following the debate, or as a reference for later when the election campaign begins.

Let’s start with the obvious.

A distinction must be made between net and gross debt. There is a nasty habit of some people starting a sentence referring to net debt and then finishing with a reference to gross debt. Words to the effect that “the Howard government left zero debt and now it is $300 billion” are an expression of such an error. Mr Abbott mixed up gross and net debt recently, but his Deputy Julie Bishop was even more extreme, saying that, “I think Australian people understand that when government debt goes from zero to heading towards $400 billion then that’s an emergency.” For Ms Bishop, who was shadow treasurer in 2008 and 2009, this is an embarrassing error.

It’s a bit like saying, before I bought the house, I had no debt and I had $50,000 in savings. Now those savings have gone and I have debt of $500,000. What a hopeless manager of money I am.

Even the lamest financial planner with white shoes can see the fault in that discussion.

It is an important fact to note that the Howard government did not eliminate gross debt. Indeed, in the three months leading up to the election on November 24, 2007, the Howard government borrowed money from the capital markets on eight separate occasions (issuing government bonds) including just 11 days before polling day. At no stage under Mr Howard did gross debt fall below $47 billion, and since Federation in 1901, the Australian government has always had gross debt. Always.

What is true is that under the Howard government (and Whitlam government, for that matter) net government debt not only fell to zero, but the government accumulated financial assets, or had negative net debt. Under the Howard government, these financial assets peaked at 3.8 per cent of GDP, while under Whitlam, government financial assets peaked at 3.1 per cent of GDP.

It is not unusual in the last four decades or so for the government to have no net debt. That said, the Howard government helped reduce government debt by a large-scale asset-sales and privatisation program which was around $83 billion in today’s dollar terms. At the same time, the Howard government cut public spending on buildings and structures to a record low as a per cent of GDP in an effort to meet the holy grail of budget surpluses.

A cynic might say it is easy to have a budget surplus and eliminate debt by selling assets and not spending on infrastructure.

The latest budget figures show that net government debt will peak at 11.4 per cent of GDP in 2014-15, or around $191 billion. By way of comparison, net debt is over 80 per cent of GDP in the US, the UK, and France, and is even higher in many other countries. This makes a mockery of the proposition that Australia’s net government debt is anything other than low.

Amid the likely discussion on government spending, the following points can also be confirmed.

Government spending as a percentage of GDP was 24.2 per cent in 2012-13. This is exactly the average level of government spending under the Howard government, 1.4 per cent of GDP lower than the average of the Hawke/Keating governments, and exactly the same as the average of the Fraser government.

Taking account of the whole period Labor has been in office, and including the forward estimates, government spending to GDP will average 24.7 per cent of GDP which includes the temporary impact of the stimulus measures in the period from 2008-09 to 2010-11. Hardly reckless spending.

In terms of the tax to GDP ratio, the Labor Party takes the cake as the lowest taxing government since the 1970s.

The tax to GDP ratio fell to 20.0 per cent in 2010-11, down from the highest taxing years in Australia’s recent history under Mr Howard when the ratio hit a thumping 24.2 per cent. For the record, in 2012-13 dollar terms, the 4.2 per cent of GDP difference in the tax take is an eye-watering $65 billion – in just one year.

Indeed, the six years with the highest tax to GDP ratios recorded were all under the Howard government which meant an average tax to GDP ratio of 23.4 per cent. This compares to 21.7 per cent for the current Labor government, while tax under the Hawke and Keating governments averaged 21.8 per cent of GDP over their 13 years in office.

Again, a cynic might note that it is easy to get to those magical surpluses and reduce debt if you tax the tripe out of individuals and business, as the Howard government did.

It is clear that the Labor Party is a government of low tax, while the Coalition government relies on high tax to try to balance the books.

There are a number of other points to help those wanting to follow the debate on public sector finances. Not only is the Coalition side of politics proven to be dependent on high tax levels, but they seem incapable of ever cutting government spending. Never once since 1971-72 has a Coalition government delivered a cut in government spending in real terms. Never. Under Labor governments, cuts in government spending have occurred in five years – three under Hawke and two under the current government.

While Coalition governments have cut programs when in office, it is clear from the budget facts that the savings always leak out into pet projects and that the size of government remains large.

Amid all of this, the credit ratings agencies at the moment continue to affirm Australia’s triple-A credit rating with a stable outlook. This is the best any country can get. The key driver of that rating is the health of public finances – in other words, the deficit and debt.

Mr Abbott has said that “prudent fiscal management is in the Coalition’s DNA”. Maybe that DNA is malformed and prone to twists, spin and distortions because the facts over four decades of fiscal policy in Australia prove otherwise.

There is a final point to note. The “$96 billion of government debt inherited by the Howard government in 1996” we hear Mr Abbott talk about included an amount of around $40 billion in 1996 dollar terms (7.5 per cent of GDP) which was actually Fraser government debt accumulated under Mr Howard’s watch as Treasurer that was inherited by Mr Hawke in 1983. That inconvenient fact is rarely if ever considered in the whole debt debate.

It is pity that Mr Abbott will not stump up to debate Mr Rudd on Thursday, but the fiscal facts explain why.