economics , budget , I need help

[ramblingboy42]

On the news our PM's latest brag is he'll, yes he, will bring down a budget in april that will be in the blue. Congratulations to his team if he does.

What I can't understand is currently Australia's net debt is $355billion and climbing.How can a budget be delivered that is financially positive if we carry so much debt?

What matters? the budget as saleable illustration of our government's financial management? or isn't the current net debt a performance indicator of the government?

Mods, I'd love to see this discussed openly from a knowledge viewpoint and closed if it becomes a political debate.

[V8Ian]

In reality, where do you expect it to go, RB?

[ramblingboy42]

If some here have some answers to my questions...anywhere.

If no one knows or cares , no-where.

[grey_ghost]

Maybe (in overly simplistic terms) the government feel that they have debt in control and can reduce it. Maybe they mean that there is an acceptable level of debt - like having a mortgage. Not sticking up for the government but perhaps that is their argument - they have debt under control? Dunno

[rar110]

Your question relates to Commonwealth Govt spending and debt.

Central Government ( ie commonwealth) debt, particularly in Australia, is not the same as household debt. Nor is it the same as debt for countries in the EU with more limited controls or levers.

The RBA and Treasury work together (ATO or tax policy is part of the picture) but independently to manage the amount of money and spending in the economy. One persons/company’s spending is another persons income which is taxed, the remainder is saved or spent. The spent bit is another persons income which is taxed etc etc. it’s called the multiplier effect. When government spends or in other ways puts money into the economy a lot of that money comes back to govt through tax. So central govt spending is not simple or bad necessarily. Central govt spending is not the same as household spending.

A surplus budget (more incomings than outgoings) means there is some money to retire or reduce govt debt.

[Homestar]

Um, politics? In general chat? hmmm...

[V8Ian]

So far it's not political, it's an explanation of how economics works. Alas, I fear it won't stay that way long.

[bob10]

Well, budget 101.

Budget explainer: Debts and deficits, is Australia really the worst? (https://theconversation.com/budget-explainer-debts-and-deficits-is-australia-really-the-worst-40086)

[bob10]

But wait, there's more.

Budget explainer – News, Research and Analysis – The Conversation – page 1 (https://theconversation.com/au/topics/budget-explainer-16727)

[bob10]

And more. Fact checks in journalism

YouTube (https://www.youtube.com/watch?v=aYLdaZWt9H8)

[rar110]

Commentators often like to compare household spending/debt with central government spending and debt. But factors or levers like taxation, multiplier effect, grant and other stimulus initiatives, bond market activity, expanding and contracting or stabilising the amount of cash floating around the economy all make central govt different.

It’s not realistic to compare the Commonwealth govt with Greece (or other EU countries) who don’t have the freedom for example to change the amount of cash in their economy as they use a shared currency.

It’s also difficult to compare Australia with the US Federal government, which has a very different executive system of government. In Australia the Prime Minister (POTUS equivalent) and other executive members sit in the Parliament (Congress/Senate equivalent). In the US, the President and other executive govt members don’t.

[Homestar]

So far it's not political, it's an explanation of how economics works. Alas, I fear it won't stay that way long.

I think you’re right.

[Blknight.aus]

as I understand it (and its not black smoke and sparks so I dont really care) as it was explained to me.

A Red budget is one that is forcast to spend more than it rakes in
A Black budget is spending what it rakes in
A blue budget is one that is spending less than it rakes in but still has prior debts to soak up that margin (on going projects from previous budgets that have over spent but are still on going)
A green budget is one that is spending less than it rakes in and has no prior debts soaking up the margin.

The green budget is the only one that reduces the national debt

[JDNSW]

Basically, a budget in the black does not mean there is no government debt - it just means that outgoings are less than incomings.

The worry about high levels of government debt is that interest rates are currently at almost record lows. Which means that the only way there can be substantial movement is up, and when interest rates go up, the cost to the budget of paying interest on government bonds goes up, and it can become a major budget expense. (As has happened in the past)

But if interest rates go up, government debt is the least of our worries - household debt in Australia is among the highest in the world, and any substantial increase in interest rates will have dire consequences for a lot of people - and for the housing market as loans are foreclosed or there are forced sales.

[rar110]

A govt bond has a face value payable on maturity. The face value doesn’t change, in particular because of interest rates changes. It should also be noted the RBA does a fair bit of market intervention to influence interest rate levels.

The Australian Govt high credit rating means it negotiates very favourable debt terms for things like major infrastructure. Australia also now has the benefit of a huge superannuation pool (savings) that is looking for low risk investment return eg central government. So comparison with past circumstances is also not easy.

Personal debt levels is a concern, particularly if interest rates rise. This is a new unknown. While it’s unknown if it will be repeated, during the depression, housing prices did not go into free fall.

[tact]

If some here have some answers to my questions...anywhere.

If no one knows or cares , no-where.

Budget in surplus..... debts (may) get paid down, reduced, over time (which is how they built up)
Budget in deficit... debts only go up, by definition "living beyond one's means"

[Roverlord off road spares]

So far it's not political, it's an explanation of how economics works. Alas, I fear it won't stay that way long.

Hi got a slap for just using the word government in general chat was told it go CC

[incisor]

Hi got a slap for just using the word government in general chat was told it go CC

context is everything...

[JDNSW]

Where high government debt becomes a real issue is when a bond matures and the interest rate that has to be paid on a replacement bond is higher than that paid on the maturing bond. (when a bond matures, it is replaced by issuing a new one for the same amount, unless the debt is being reduced by paying out the maturing bond from the current account.)

Government debt becomes a significant problem when the interest payments on it become a major part of the budget. A government in this position has the choice of reducing other expenditure, increasing taxes, or (effectively) printing more money. The first two options are never popular, and the third is a slippery slope to disaster - the interest rate needed to be paid on new bonds will have to increase by the amount the buyers expect the currency to be devalued by the money printing. A government is very likely to be forced to fund the interest payments by further borrowing. As has been repeatedly demonstrated in other countries, this can snowball very rapidly, one classic case was Germany in the 1920s (leading to the rise of the National Socialists) and we are seeing it today in Venezuela. There are plenty of other examples.

At present, we are in a situation that needs care, because as I pointed out above, interest rates are at record lows, which means that the interest payment is low by historical standards (and probably dropping as older, higher interest, bonds mature). But it means that the interest charge part of the budget is very sensitive to interest rate rises - it would be very easy for that figure to double or more without the debt level changing.

Without looking at numbers, I suspect it could be argued that the deficits of the last ten years (and more) have effectively been funded by the falling interest rates.

[rar110]

Bonds are generally paid for by issuing another bond and so expanding the debt levels.

Rapidly expanding debt (a relative concept eg compared to GDP) is dangerous. I don’t think the Australian Govt has rapidly expanding debt. We have an expanding population and there is a need for more infrastructure. One of the biggest challenges and opportunities. Infrastructure cost is interesting.

One of Australia’s best known infrastructure projects (Sydney Harbour Bridge) cost about $13.5M. A significant cost in 1932, but not in today’s money. It continues to deliver public value. So clever infrastructure spending, that delivers value long term, is worthwhile, unless it results in excessive debt levels (another relative concept).

The Australian economy, partly due to macro economic reforms largely done in 1970s & 1980s and some unwelcome financial sector regulation and deregulation, has been very stable for the last two decades. Successive administrations have managed to keep the economy pretty much in the goldilocks zone (not too hot, not too cold).

Current household debt, in some sectors, is an area of concern. But interestingly in the not too distant past, business debt was the big area of concern. Concerns (risk) are managed, they come and go.

[Eevo]

The Australian economy, partly due to macro economic reforms largely done in 1970s & 1980s

i would argue those macro economic reforms continued into the 90's and early 2000's.

the henry tax report would of been a good one to implement.

[3toes]

In simplest terms a budget surplus means you are taking in more than you are spending. You can achieve this without reducing debt which is the amount you owe. These are different things which are often confused.

Then there is the question of what kind and whose debt as others have alluded to.

After paying down debt from 1995 to 2007 the Australian government has been borrowing to what are historically high levels since then. Rising steadily from 10% to 40% of GDP over the last 10 years.

By international standards Australia even at this higher level had a low debt level.

For some easy to understand info try trading economics.com

[DiscoMick]

Company tax collections are rising so they expect incoming to exceed outgoings.
Our government debt to GDP ratio is relatively low by world standards - some countries are over 100%.
There are various ways to measure this and it can get very confusing.
Raw debt has roughly doubled over the last six years, but incomings also rise each year to fund repayments.

[Disco-tastic]

I've always wondered where governments borrow from. Other governments? Private entities?

[rar110]

Traditionally Govt bonds would be bought and sold as large package. Now they are exchange traded in smaller packages.

https://australiangovernmentbonds.gov.au

[JDNSW]

I've always wondered where governments borrow from. Other governments? Private entities?

Government borrowing usually takes the form of bond, which may be issued on the open market, or sold as large packages to institutional investors such as super funds, and, possibly the largest proportion of them, are sold to existing bond holders in exchange for maturing bonds.

The bonds may be sold domestically (the majority of Australian government bonds) or internationally.

In addition to bonds, it is possible for governments to borrow by any arrangement that is legal - and they can change the law if necessary to make the arrangement legal. One way out example is the Whitlam government's attempts to borrow from shady middle East sources in the Khemlani affair. There was doubt cast as to whether this was actually legal, and the government did not have a majority in the Senate, so could not have made it legal. But it is an indication as to the sort of thing that is possible.

[rar110]

In addition to bonds, it is possible for governments to borrow by any arrangement that is legal - and they can change the law if necessary to make the arrangement legal. One way out example is the Whitlam government's attempts to borrow from shady middle East sources in the Khemlani affair. There was doubt cast as to whether this was actually legal, and the government did not have a majority in the Senate, so could not have made it legal. But it is an indication as to the sort of thing that is possible.

That’s was an interesting situation, and some questionable arrangements. Soon after there was a world wide down turn, stagflation and interest rates increased substantially. In retrospect it was was a cheap loan arrangement. There was a lot of concern about excessive debt levels and spending by the present Govt. Interestingly, successive governments began borrowing/spending far more. So what’s excessive spending and debt levels is relative concept, back then and now.

Here’s a graph of net debt relative to GDP. Clearly there was capacity for more Govt debt in 1974, at the time of the Khemlani loan controversy.

https://uploads.tapatalk-cdn.com/20181204/0b47fd0650eaf87a5fc464d5a758a767.jpg

[JDNSW]

The controversy over the Khemlani affair was not because of the level of debt, but because of the reason for wanting the loan (to circumvent a refusal by the Senate to pass a supply bill) and the paying of a shady offshore "fixer" to arrange the finance for a generous fee.

But I just mentioned it to show the rather non-obvious sources that governments can tap for money.

Historically, lending to governments has been fraught with danger, but has become a lot safer over the last hundred or so years as revolutions have become less common. To the extent that government bonds, in Western Democracies, are considered one of the safest forms of investment. And hence can pay lower interest! But if government actions lead to any suspicion by investors that either inflation is going to increase, or that there is some doubt about payment on maturity, then the interest that has to be paid to sell the bonds will increase, something that governments are usually anxious to avoid.

[rar110]

Ok.

[3toes]

Like many things in life used correctly it will not harm you. The trick with any debt is figuring out what the safe level is. This will vary depending on many factors and so is not a constant

One reason the GFC only glanced Australia was that low levels of debt allowed the government to follow orthodox fiscal rules and spend to keep the economy moving. Countries that were already fully borrowed before their tax takes were reduced by the down turn did not have this lever to pull.

Where available funds are not taken advantage of also has an economic cost. Borrowing at the moment is at historically low levels so locking these funds in now could be seen as cheap and smart if borrowing costs go up tomorrow

[rar110]

Some in the financial sector were saying Australian markets were being held back by regulation, and preventing full entrepreneurial potential.

That opinion in Australia was quelled by the GFC. But not so much in the USA.

[DiscoMick]

Remember too that our massive super funds keep part of their money in government bonds, so that helps the government.
During the GFC our banks were helped because super funds kept part of their money in our bank deposits, which helped when it was hard for our banks to borrow overseas.
Our massive super savings stabilise our financial system.