Shane Wright: Budgets in the red at our risk

Josh Frydenberg set a record of sorts when he revealed the final numbers for the 2017-18 Budget.

While the Government was keen to focus on the improved bottom line — a deficit of only $10.1 billion — neither he nor Finance Minister Mathias Cormann went to one particular number.

The total value of government bonds, or for you and me, total debt that has to be repaid, reached a record $531 billion.

The $531 billion is a bit misleading. As the economy, and the Budget, has grown the total level of debt has grown with it.

So that’s why we should look at the number adjacent to that scary $531 billion.

That number is 28.9 per cent. That is what $531 billion is as a share of Australia’s total GDP.

The last time government gross debt reached 28.9 per cent of GDP, John Gorton was prime minister, Les Bury was treasurer and a bloke named Neil Armstrong had just walked on the moon.

In the past two years alone, government gross debt has climbed $111 billion. It’s the second biggest two-year increase in gross debt on record.

The record, of $132 billion, was set by this Government between 2014-15 and 2016-17.

Debt, particularly if it’s being funnelled into important infrastructure (and that can be better-trained nurses as much as a freeway or tram line), is a good use of a Government’s resources. And some of this debt has gone to projects across the country that will pay dividends into the future.

But carry too much and it can limit your options.

John Howard and Peter Costello had driven total gross debt down to 4.7 per cent of GDP in 2006-07. That low level gave the Rudd and Swan government the fiscal room to move when the global financial crisis struck in 2008. Without that fiscal room, for instance, the lift in spending to cushion the blow of overseas events would not have been there.

Going back further, the Hawke-Keating Government took debt down to 11.8 per cent of GDP ahead of the 1990-91 recession.

Debt always goes up in recessions. That’s the way a Federal Budget should work, cushioning the economic blow.

But in Australia’s case, debt continues to climb even as the global and local economy improves.

Now let’s have a look at the final outcome for the 2017-18 WA Budget.

The numbers released by Ben Wyatt last week also revealed a substantial improvement in the State’s finances. A deficit that was tipped in September last year to be $2.3 billion came in at $618 million.

Some of it is due to the McGowan Government’s tough line on spending. Excluding the costs of redundancies, spending increased just 0.2 per cent over the past 12 months. There is also a fair amount due to a better-than-expected State economy (that’s shown up in the higher payroll tax collections, for example) which has given a bit of money back to government coffers.

And rounding it out has been some one-off movements in Federal funds which landed in 2017-18 rather than in the current financial year.

What did this do to State debt? It, like its Federal counterpart, also went up.

When Wyatt penned the original 2017-18 Budget, he forecast net debt would rise to $24.1 billion. That would be a hefty 28.2 per cent jump on the level at the end of 2016-17.

The broader measure of State debt, taking in all business groups and the such, was expected to grow to $37.8 billion from $32 billion.

Instead, with all the numbers for the just completed financial year reconciled, net debt finished at $21.7 billion and total public sector net debt hit $34.6 billion.

Better, no doubt about it, but still markedly higher than where the State’s finances were at the end of 2016-17.

Wyatt can rightfully argue the WA economy is not chugging along nearly as well as the Federal one. When the State economy picks up some steam, the deficit will narrow then disappear while net debt — barring a spending binge — will also come down.

However, he still has a State’s finances that are ranked by ratings agencies as the worst in the Commonwealth. Josh Frydenberg can point to S&P Global’s recent decision to take the Commonwealth off negative watch with a triple-A rating as proof of how Canberra has its house in order.

Of course, that would ignore the point that S&P put Canberra on negative watch while the coalition held the nation’s purse strings (which it did when Scott Morrison was treasurer). But we’re in a political world where anything that happened last week, last month or last year is ignored to the point George Orwell would be proud. At least the McGowan Government can keep focused on improving the Budget because it won’t be going to the polls until next decade.

Expect the next Budget update, for instance, to show the long-term prediction of net debt reaching $42 billion to disappear on the back of improving finances and spending restraint.

For Frydenberg, Morrison and Cormann, the situation is different. They are in the fight of their political lives. And we all know what happens when a government faces its political mortality.

In May, the Government flagrantly ignored its own “Budget repair strategy” which commits it to “more than offset” any new spending with cuts elsewhere and also to bank any extra revenue delivered by better economic times.

Outlining the Budget update last week, the Government was at pains to explain how a “stronger economy” would help it pay for its promises.

We’ve yet to hear how the best part of $20 billion worth of recent promises (such as abandoning the plan to increase the age pension access age, the pay-off to the Catholic school sector) will be squared with the budget rules.

Frydenberg says the Government will abide by its rules.

This is his chance to put his stamp on the Treasury and the Budget. But can you remember the last time a Government went to an election promising $20 billion in spending cuts? Me neither.

There are good signs the Federal and State budgets are improving.

It’s coming on the back of spending restraint but mostly on the back of the lowest interest rates in 50 years and a global economy growing at its strongest in more than a decade.

Both the Federal and State governments are carrying too much debt for this point in the economic cycle.

And that’s an interest for future taxpayers as much as it is for those of us today.