Cut debt or face a Greek future
Earlier this week, Shadow Treasurer Chris Bowen again sought to “inject some context into the budget debate” by comparing our relatively low debt levels with those of other countries, particularly European ones.
This is the constant argument from those who dismiss Australia’s debt as a problem: debt levels in places like Greece are well over 100 percent of Gross Domestic Product while in Australia they are 15 percent.
The problem with Bowen’s “context” is that it is selective in time. Countries like Greece may have significantly higher debt levels than ours but they didn’t start that way. Rather, they started with low debt but found it impossible to stop its growth (despite repeated warnings) until it was too late.
This is the real and most meaningful context for the Australian budgetary debate.
The history of Greece’s debt is instructive. Greece had debt levels of 20.6 percent of GDP in the early 1980s – just above Australia’s debt levels today.
Within six years it had climbed to 43.4 percent of GDP, the place Australia would have reached by 2036 had we continued under Labor’s policies.
By this stage, the OECD, had started to get concerned. In 1986, it noted that the steep upward trend in government recurrent expenditure was contributing to worsening domestic imbalances. It raised concerns that Greece would face a rising debt servicing burden over the medium term and that excessive growth in public consumption was effectively crowding out investment.
By 1990, Greek debt was 64.2 percent, the place Australia would have reached by 2043 under Labor’s trajectory.
By then, the OECD’s warnings to Greece became even stronger. It noted that given the high deficits and the rising debt repayments, debt to GDP was “bound to rise further, quickly attaining explosive levels.” They warned that the already negative impacts on inflation, growth and overall financial stability would become more serious over time. It noted that the “composition of public expenditure” would have to change “in order to make room for the rising share of interest payments.” In short, services would get less funding in order to pay for the interest charges.
Despite the fiscal consolidation program it embarked upon in the 90s, debt continued to rise, reaching 103.7 percent by 2001 and 129.7 percent on the eve of their sovereign debt crisis.
Again, in reference to Labor’s trajectory in Australia, these two milestones were to be reached in about 2052 and a few years thereafter.
We all know the situation with Greece today: unemployment at 26 percent; an economy that has shrunk by a quarter, having had six years of recession; and considerable social unrest.
Greece never sought to be in this position. When it started to receive warnings about its debt levels back in the 1980s, it didn’t act. By the 1990s it started to cut back on some spending, but couldn’t do enough. By the 2000s, it was too late.
Despite continued warnings, it was simply not able to adjust.
Australia is not Greece – either the Greece of today or even the Greece of 1980. Our institutions are stronger, our economy more dynamic and there is very little corruption or widespread tax evasion.
Nevertheless, the lesson is clear: once a country is on a debt pathway, it is difficult to turn it around. And what can start as a smaller debt can quickly become a seismic one.
Greece’s position changed from manageable debt to unmanageable debt in twenty years, but it doesn’t need to take that long. Ireland’s position collapsed from a debt level of 11.1 percent of GDP in 2007 to 90 percent within six years.
During the Rudd/Gillard years, we had the fastest budget deterioration in modern Australian history.
Despite its repeated assertions that it was delivering surpluses, it continued to have record budget deficits. Worse, it locked in real annual spending growth of 3.7 percent, despite the economy only growing by less than 3 percent.
Without the discipline that balancing the books provides, it simply kept bowing to pressure groups who always seek higher rents.
The Intergenerational Report now provides a clear choice in terms of addressing our budgetary problems.
The first is to go down Labor’s path and follow the debt trajectory of Greece, albeit over a slower timeframe. The alternative is to fix the budget now while growth is returning, inflation low and before debt becomes unmanageable. We are well down this latter path, and for the sake of the nation, hope that Labor will one day join it.
Alan Tudge is Parliamentary Secretary to the Prime Minister