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Budget cuts loom as Frydenberg ramps up debt-and-deficit. Here’s why it’s bullshit.


It’s time, declared the Financial Review, to start budget repair. “The budget is spinning out of control.”

It’s code, of course. What it really means is that the public sector should be shrunk even further, that we must learn to live within our means, to get out of the way of the private sector and let business get on with the job.

It’s code for running our schools, universities, and hospitals down even further, in the name of responsible fiscal management.

After an uncharacteristic period of Keynesian stimulus during the pandemic lockdowns, Josh Frydenberg is reverting to type. “Now is the time to start confidently moving back towards normalised economic settings,” he told the Australian Industry Group last month. “It is time to let businesses get back to business.”

It doesn’t stand up to scrutiny.

Government debt in Australia is low by international standards. Global financial markets are not about to punish this country for its debt levels as they did when Greece, Portugal, Ireland and Spain went broke during the global financial crisis. If Australia has a problem with public debt, what about those countries with which we compare ourselves?

The figures tell the story:


Apparent debt rose during the pandemic for two reasons: stimulus by governments around the world, and because GDP (the usual comparator) fell. It happened pretty much everywhere.

But something else happened also that makes that increased debt much less scary. In order to keep interest rates low, central banks in most developed countries started buying up government bonds. And they paid for them with money created out of nowhere. It’s called quantitative easing.

Any government with a fiat currency – one that’s not tied to gold, or to the US dollar – can simply create new money. These days they don’t even have to print the stuff.

As a result of all that quantitative easing, Australia’s Reserve Bank now owns $288 billion worth of federal government debt. That’s a third of all the Treasury securities on issue. In other words, one arm of government – the Treasury – owes $288 billion to another arm of government – the Reserve Bank. To regard that $288 billion as debt in any practical sense is plain nonsense. It’s a book entry.

But even that overstates the government’s real debt position. The government owes money to others, but others also owe money to it. When we look at net debt, it’s even less scary.

$ million

% held by RBA

Real position ($m)

Bonds & notes on issue




Net debt




According to the recent Budget, gross debt this financial year is estimated at $906 billion, or 45.7% of GDP. But the amount the federal government actually owes is $343 billion. That’s just 17.3% of GDP.

The idea that Australia has a debt problem – and must therefore cut services – is clearly nonsense. Take a look at the next four graphs, which compare our spending on key public services – health, schools, tertiary education and pensions – with other similar nations. The figures are from the OECD and include all levels of government.

International comparisons show claims that Australia cannot afford better hospitals, properly-funded Medicare or dentistry are simply nonsense. If they can, we can:


Our spending on schools is in line with other countries but an outsized share is directed to wealthy private schools rather than government schools with far greater needs:

And our funding of universities and other tertiary education is poor by international standards:


 Next time a politician tells you we can't afford to increase pensions, show them this:


It’s pretty clear that if Australia wants to maintain its relative place in the developed world, spending needs to go up, not down further.

Right now we can afford to do that, but continuing to borrow at high levels from commercial lenders is neither necessary or prudent. We do, though, require some new thinking.


John Howard and Peter Costello gave away the temporary revenue windfall of the mining boom in permanent tax cuts. It was a typical starve-the-beast operation: reduce revenue to force cuts to spending. But cutting taxes is so much easier then reducing spending, so the federal government has consistently spent more than it’s able to raise. That gap has been filled with borrowings – Treasury bonds sold to local and international banks and investors.

There are many reasons to embark on serious tax reform, but this is one of them. Tax, though, is not the only alternative to borrowing.

As we’ve seen over the past couple of years, the Reserve Bank – and many other central banks – can create new money without compromising confidence in the currency. So far it has supported government spending indirectly, using its newly-created money to buy back bonds in the market. But it could use that new money to fund government programs directly, cutting out the commercial bond markets – and the interest they charge – altogether.

It's not a suggestion that has been received warmly – so far – by the current leadership of the Reserve Bank. The bank’s official charter is too vague to address such specific questions. But the independence of central bank officials is always, and properly, dependent on the policies of the elected government.

If the elected government wanted to use this avenue to fund certain programs, the bank would want to be confident that its primary objective – controlling inflation – was not compromised. That can be done.

Right now, with inflation soaring, it would be foolish to tip much more cash into a construction sector which is already overheated. But there are plenty of alternatives – training and employing nurses, funding state public hospitals, replenishing the depleted university sector, improving the NDIS, boosting international diplomacy, restoring foreign aid to the Pacific and elsewhere.

Of course, another way of fighting inflation is to take money out of the economy by simultaneously increasing certain taxes – cutting back on over-generous capital gains tax breaks, for instance. For decades, wage-earners have been penalised by a tax system that penalises them and enriches the owners of capital. Maybe it’s time to restore a long-lost balance.

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