Debt Ceiling

I spoke in parliament last night about the Opposition's threat to block an increase in Australia's debt ceiling.
Debt Ceiling
23 May 2012

On 17 April this year the member for North Sydney [Joe Hockey] travelled to London where he gave a speech in which he said that Hong Kong's government debt was 'moderate'. That speech pointed out that Hong Kong's gross government debt was then 34 per cent of GDP. As Simon Howson pointed out to me, given that Australia's gross government debt will peak at 18 per cent of GDP, the only appropriate word for Australia's debt levels is 'low'. Australia's net debt as a share of GDP will peak at 9.6 per cent of GDP. That is like somebody earning $100,000 and owing $9,600. This debt was, of course, taken on in order to save jobs—200,000 of them, and tens of thousands of small businesses.

Late last year, Australian banks were actually concerned that there were too few Australian government bonds in the market for them to meet the Basel III requirements. They were concerned that the Australian government had too little debt, and Australia's debt levels will peak at one-tenth of the average in major advanced economies. But now the coalition appears set to stand against an increase in Australia's debt ceiling, to stand against an increase in Australia's debt limit.

I want to use the opportunity tonight to inform the House as to the consequences of this reckless action. Rob Nicholl, head of the Australian Office of Financial Management has told the government:

‘Any uncertainty whatsoever as to the Government's ability to undertake normal debt management operations would create widespread and potentially serious negative speculation, this in turn creating unfavourable perceptions on the part of the investment community.’

Mr Nicholl told the government:

‘With increasing scrutiny of, and interest in, the market for CGS, it is critical to maintain a clear and unambiguous signal that debt market operations will not be impeded…’

We are raising the debt limit for two reasons. The first is that revenues tend to come in later in the year and payments are made throughout the year, so government needs to meet the gap through temporary further issuance in short-term markets. The second is to manage maturity of long-term bonds outstanding. Prior to their maturity, the Australian Office of Financial Management has to accumulate enough money to pay out the long-term bond holders because not enough tax receipts have yet flowed in. So for a little while we have twice the amount of bonds on issue before we pay off the first lot of long-term bonds. While the budget papers show that Commonwealth government securities on issue will be under the existing limit, fluctuations require us to raise the debt cap. This is, of course, sound economic management, as Paul Krugman pointed out during the US fight over the debt:

‘… since debt is the consequence of decisions about taxing and spending, and Congress already makes those taxing and spending-decisions, why require an additional vote on debt? And traditionally the debt limit his been treated as a minor detail.’

But not so under the wrecking ball approach of those opposite. As Stephen Koukoulas has observed:

‘Think back to what happened mid last year. Congress was going to block a required increase in the US debt ceiling. The US government was going to miss its bills. I don’t want to overstate it, but things got pretty ugly... Around 80 per cent of our bond market is held by foreigners. We can’t afford to alienate these people by playing silly buggers with the ceiling.’

The approach that the coalition is taking over the debt limit is an approach that is aimed at convincing investors that Australia is no longer a responsible country. As Mike Konczal of the Roosevelt Institute puts it, the approach of the US Republicans, which is effectively the approach of those opposite, is to come around with baseball bats declaring: 'Nice economy you have here. A real shame if something happened to it'.

Raising the debt limit is sensible economic management. Those opposite, including the member for North Sydney, have called for more 30-year bonds. He has spoken overseas about the 'moderate' debt of a country with nearly twice Australia's debt levels, and yet here, as Stephen Koukoulas has said,

‘… the opposition is willing to risk overseas investor confidence in Australia for the sake of a cheap political point.’

The opposition should stop playing politics with the debt ceiling and start focusing on the national economic interest.

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