Governments and taxation exist, in part, to deploy our combined resources and assist during periods of pronounced volatility. Then, in better economic times they use subsequent windfalls to restore balance to their fiscal settings.
However, consider total Australian government debt on issue since the 1970s. We saw a low point in the 2000s, as the first mining boom boosted our coffers like never before. Then we had a little thing called the Global Financial Crisis and the corresponding response from Government: the payment of cash to citizens to spend, and the building of schools and infrastructure, among other things.
In the decade after, fiscal largesse became the norm. Arguably in 2018-19 we turned the corner with government debt on issue starting to moderate. Then along came the COVID pandemic and the various fiscal responses, headlined by JobKeeper and JobSeeker. To reiterate, these interventions certainly made sense to maintain economic stability, ensuring Australian’s kept their jobs and had sufficient financial means to get through a period of economic and physical lockdown. However, those fiscal responses come with generational implications.
Consider global debt to GDP levels. Today, advanced economies sit with debt levels not seen since the Second World War period. Fiscal responses which maintained employment, but which have also turbocharged debt.
The net impact of a higher debt burden is that it makes us more vulnerable to any future shocks and, as we have seen in the past year, these interventions have been ultimately inflationary.
Now consider that government debt-to-GDP levels, which previously peaked around World War 2, did not normalise until the 1970s. The burden, therefore, we face now is an elongated period of debt, hampering investment, productivity, growth and standards of living well into the future. Restoring longer term normality to debt levels will be a hard graft. Not only will it mean restrictive fiscal settings, but it is also politically unpopular. Outside of Liz Truss, governments are still being voted in based on promises they make on future increased spending of our money, not future restrictions.
But, we are beginning to see the first signs of governments tightening the belt. Recently, the Victorian state government has planted seeds of delaying commencement of its Airport Rail Link. Federally, the Labor government is reticent to spend beyond cost of living assistance to the most marginalised groups, and will likely also seek to defer certain infrastructure spending. The May budget has walked a fine line between easing cost of living issues and beginning to address the ever-growing debt burden. There is, however, much work to be done. Work that will be challenging in the moment, but remains key to our future prosperity.
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