Many think “alternative facts” are synonymous with fake news. But bringing to light alternative facts that are true can help balance a story. Such is the case with the recent federal budget.
Several alternative facts about Australia’s fiscal position that to date have been largely ignored suggest a less sanguine view than that conveyed in the budget papers and commentary on them.
Consider the budget deficit measure - the shortfall between government revenue and expenditure - a macroeconomic variable of interest as it represents the government’s borrowing requirement.
All advanced economies, except Germany, Iceland and South Korea, are still running sizeable budget deficits after the global financial crisis. Collectively these deficits have exhausted a huge pool of private saving that could have been used to fund private investment. With this in mind, the private investment drought in Australia and other advanced economies is hardly a mystery.
Yet the fiscal drain on private saving stemming from annual budget deficits is just part of the story. The drain is significantly larger because budget deficits only convey the government borrowing requirement for the financial year in question, not the total government borrowing requirement in that year arising from maturing short-term debt because of previous budget deficits.
An interesting alternative fact is that Australia’s total budgetary financing need in recent years, inclusive of short-term debt falling due for repayment, has significantly exceeded actual budget deficits. You would be hard pressed to find this data in the budget papers but it’s readily accessible from the International Monetary Fund’s biannual Fiscal Monitor publication.
Whereas Australia’s budget deficit in 2017 on a calendar year basis was 2.4 per cent of gross domestic product, IMF estimates show the total government financing need, including maturing debt, was 3.2 per cent. A 3.6 per cent of GDP financing need is predicted for next year, almost three times higher than the budget deficit as a proportion of GDP.
In other words, the focus on the budget deficit alone as the indicator of the government’s call on domestic and foreign saving misses a major element. That the Australian government will continue to borrow significantly more than posted budget deficits in the near future because of past deficits implies a bigger negative for the economy.
That said, Australia’s total budgetary financing need in coming years is better than many other advanced economies, thanks to having a very low public debt position at the time of the GFC.
What stands out from IMF data is that the most moribund European economies tend to have budgetary financing needs that are much higher than their ongoing budget deficits. This is because those countries already had public debt overhangs going into the financial crisis that were compounded by recession and damaging fiscal stimulus. These include France, Greece, Italy, Portugal and Spain.
The standout advanced economy, however, is Japan, whose total government financing need in 2017 is estimated at more than 40 per cent of its GDP. Oddly, few economists ever draw the link between Japan’s decades-long economic torpor and its public debt mountain. What it means is that Japan’s high private saving is forever being recycled into low-yielding government bonds rather than directed to growth-enhancing private investment.
Meanwhile, what governments finance with borrowing is important. So it was a welcome development that this year’s federal budget papers give greater prominence to the net operating balance measure, a “new” official alternative fact, publication of which is in line with budgeting practices adopted by Canada, New Zealand and the Australian states.
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