Cut debt or face a Greek future

Release Date: 
18 March 2015

Chris Bowen has again sought to "inject some context into the budget debate" by comparing our relatively low debt levels with those of other countries, particularly European ones.

This is the constant argument from those who dismiss Australia's debt as a problem: debt levels in places such as Greece are well over 100 per cent of gross domestic product while in Australia they are 15 per cent.

The problem with Bowen's "context" is it is selective in time. Greece may have higher debt levels than ours but it didn't start that way. Rather, it started with low debt but found it impossible to stop its growth (despite repeated warnings) until it was too late. This is the real context for our debate.

Greece had debt levels of 20.6 per cent of GDP in the early 1980s, just above our debt levels today. Within six years it had climbed to 43.4 per cent of GDP, the place Australia would have reached by 2036 had we continued under Labor's policies. By this stage, the OECD had started to get concerned. In 1986, it noted the steep upward trend in government recurrent expenditure was contributing to worsening domestic imbalances. It raised concerns Greece would face a rising debt servicing burden in the medium term and that excessive growth in public consumption was effectively crowding out investment.

By 1990, Greek debt was 64.2 per cent, the place Australia would have reached by 2043 under Labor's trajectory. By then, the OECD's warnings to Greece became stronger. It noted that, given the high deficits and the rising debt repayments, debt to GDP was "bound to rise further, quickly attaining explosive levels". It warned the already negative impacts on inflation, growth and financial stability would become more serious.

It said the "composition of public expenditure" would have to change "to make room for the rising share of interest payments". Services would get less funding to pay for the interest charges.

Despite the fiscal consolidation program it embarked on in the 90s, debt continued to rise, reaching 103.7 per cent by 2001 and 129.7 per cent on the eve of the sovereign debt crisis. Again, in reference to Labor's trajectory in Australia, these two milestones were to be reached in about 2052 and a few years thereafter.

We all know the situation with Greece today: unemployment at 26 per cent; an economy that has shrunk by a quarter, having had six years of recession; and considerable social unrest.

When Greece started to receive warnings about its debt levels back in the 80s, it didn't act. By the 90s it started to cut back on some spending but couldn't do enough. By the 2000s, it was too late. Australia is not Greece — the Greece of today or even the Greece of 1980. Our institutions are stronger, our economy more dynamic and there is very little corruption or widespread tax evasion.

Nevertheless, the lesson is clear: once a country is on a debt path way it is difficult to turn it around. And what can start as a smaller debt can quickly become a seismic one.

Greece's position changed from manageable debt to unmanageable debt in 20 years, but it doesn't need to take that long. Ireland's position collapsed from a debt level of 11.1 per cent of GDP in 2007 to 90 per cent within six years.

During the Rudd-Gillard years, we had the fastest budget deterior­ation in modern Australian history. Despite its repeated assertions it was delivering surpluses, it continued to have record budget deficits. Worse, it locked in real annual spending growth of 3.7 per cent, despite the economy growing only by less than 3 per cent. Without the discipline balancing the books provides, it simply kept bowing to pressure groups who always sought higher rents.

The Intergenerational Report now provides a clear choice in terms of addressing our budgetary problems.

The first is to go down Labor's path and follow the debt trajectory of Greece, albeit across a slower timeframe. The alternative is to fix the budget while growth is returning, inflation is low and before debt becomes unmanageable. We are well down this latter path and, for the sake of the nation, let's hope Labor will one day join it.