Monday, August 19, 2013

Some pretty big numbers are being thrown around in the election campaign – one million new jobs in the next five years and two million over the next decade. Wow! One would think all of those new jobs would eliminate unemployment or boost workforce participation to record levels. At least that is the subliminal message there.

Then there is the commentary that government debt is approaching an absolutely massive, uncontrolled emergency level of $400 billion by 2017 or sometime after that. This is a level of debt that must mean Australia is on the brink of a European-type economic and fiscal disaster. At least that is the inference of that line.

We also hear of a $70 billion budget black hole – it is a disaster, there will need to be swinging cuts or tax hikes to cover this other budget problem. The $70 billion is more than all the money being spent on health or similar, which goes to show how big a hole it really is.

Many of these sorts of numbers or claims sound big, impressive or downright scary in much the same way as someone with a $750,000 mortgage has a huge debt. Or at least they seem to have a huge debt if no account is taken of the context of such a debt.

Just say the person in question with this $750,000 mortgage has borrowed against a house worth more than $3 million, has an income of $400,000 a year and other assets worth $500,000. The mortgage debt doesn't seem too high after all.
g scary numbers during this election campaign need to be put in context.

Let's have a look at the claim from Tony Abbott that a Coalition government will create 1 million new jobs in five years and 2 million jobs in a decade.

Given current demographic trends, Australia's population is increasing by around 350,000 to 400,000 a year, give or take a few.

If this level of increase continues for the next decade, it means that in five years, there will be around 1.75 million new Australians and in a decade, well over 3.5 million. If we assume a workforce participation rate of around 65 per cent and an average or trend rate of employment, there will be actually be around 1.1 million new jobs created over five years and 2.3 million jobs created in a decade without any inroads into the current unemployment rate of around 5.75 per cent. The millions of new jobs will simply absorb the population growth – no more, no less.

I have covered the issue of government debt on several occasions in the past – the $400 billion cited in the heat of the election campaign is not backed up in the Pre-Election Fiscal and Economic Outlook document released last week – debt will peak around $370 billion according to PEFO.

But even using the inflated $400 billion claim, it firstly refers to gross debt (refer the example above on the $750,000 mortgage) and secondly it is less than 20 per cent of GDP at its peak. This is incredibly low, manageable and at a level that has seen the three credit rating agencies affirm Australia's triple-A credit rating with a stable outlook.

Of course, the level of net government debt is significantly smaller – it is forecast to peak at around $210 billion or 13 per cent of GDP. Truly chicken feed in the scheme of government finances in historical perspective or globally.

The big bogeyman of $400 billion of government debt, once exposed to the light, is merely a mouse.

The $70 billion budget black hole we keep hearing about is akin to a budget shortfall of approximately 1 per cent of GDP per year over the forward estimates. This means that instead of the budget deficit falling to 0.2 per cent of GDP in 2015-16 and reaching a small surplus in 2016-17, as currently presented under PEFO, there will be a budget deficit in each year of the forward estimates. These budget deficits would average, over those four years, around 2 per cent per annum compared with around 1 per cent per annum as currently presented.

This is probably not the best fiscal policy setting around, but it would be manageable given the current health of the government finances. It would also likely postpone the return to surplus to around 2018-19 or thereabouts and also mean that the level of net government debt would be at around 16 or 17 per cent of GDP. Gross debt reaching $450 to $500 billion would help liquidity in the government bond market but would unlikely be of major concern to global investors.

All of which shows that some of the numbers being bandied about in the current election campaign sound big, they sound scary but in reality are not particularly disconcerting when put in some context on the size of the Australian economy.

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