At the Australian Conference of Economists in Adelaide this week, Griffith University Economics Professor Tony Makin and ESA Qld Vice President Julian Pearce will present a very interesting paper titled Fiscal Consolidation and Australia’s Optimal Public Debt. Tony and Julian quantify the extent to which the Federal Government must improve its budget repair effort with a view to meeting different sustainability goals. The primary budget surplus (i.e. budget surplus excluding interest payments) that the Government returns to in 2019-20 and maintains from then on needs to be many times greater than the currently estimated 0.7% of GDP (see the chart below which I have reproduced from Tony and Julian’s paper). This will mean much greater expenditure restraint than the Government has envisaged or is likely to achieve in the next parliament. In other words, the budget repair challenge will be left to a future Government which may have to repair the Budget in a much shorter time frame and with much harsher measures.
Tony and Julian are right to highlight the urgency of the budget repair task and I am impressed at their efforts to quantify the true magnitude of the challenge. I would note, however, that the paper’s reference to the solvency of the public sector is a little imprecise. I would prefer the authors refer to the sustainability of the Federal Government’s current fiscal policy settings, which are clearly unsustainable, rather than questioning the solvency of the Government, which is not really in question at this time. As the authors note (on p. 10):
“…the financial strictures that negative net worth imposes on private firms do not fully translate to governments because governments uniquely possess the power to tax.”
This is an excellent paper which I highly recommend to readers of this blog and my former colleagues in Treasury’s Budget Policy Division who are constantly fighting the good fight for fiscal sustainability.
Incidentally, I appeared on Brisbane’s Ten Eyewitness News on Friday evening regarding a Queensland fiscal policy issue:
What economic merit is there in the objectives outlined in the paper? You already dismiss the first of their three. And I totally agree. As an additional point, the measure of government assets is a pretty arbitrary and ad hoc attempt at determining net worth, and many public assets aren’t in there.
Then we are left with “Eliminate public foreign debt” and “balance the budget”. Neither of these have an economic rationale. And their case for these is very weak. Furthermore, if foreign debt was a concern, we could just have the RBA intervene in currency markets to buy foreign assets and depress the AUD. But I doubt the prescribe this a worthy intervention to achieve the exact same outcome they desire.
And balance the budget? Do they also think the private sector should have similar objectives? If not, why not?
It is just Makin’s ideological clap-trap dressed up in economics.