economics , budget , I need help

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.

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Originally Posted by 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.

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I think you’re right.

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

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.

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.

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Originally Posted by ramblingboy42

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

If no one knows or cares , no-where.

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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"

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Originally Posted by 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.

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

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Originally Posted by Roverlord off road spares

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

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context is everything...

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.

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.