Do not let discussions of debt management sway your vote this weekend. It really doesn’t matter as much as you think. We have seen Albanese scold the Coalition for letting the nominal debt double since coming to power in 2013. Likewise, Morrison regularly attacks the Labor Party for being poor economic managers and can’t help but assert that: “Labor knows how to start spending, but they never know how to stop.” This rhetoric is fundamentally misguided from both sides. Debt alarmism is a scare tactic, and debt levels are shockingly irrelevant compared to other economic indicators like unemployment and underemployment.
First, let’s look at some numbers to get a picture of the current situation. Yes, as of August 2021 Australian national debt stood at $623 billion which is the highest number it has ever climbed to. It’s also true that forecasts indicate a rise to $1.2 trillion by 2024-2025. While large, it’s important to remember economists do not use these figures in isolation. Debt is almost always compared to the size of the economy – or GDP. The debt-to-GDP ratio currently sits at 39.5% which is lower than what it was for most of 1917-1954. Keep this in mind when any politician employs a ‘big number scary’ tactic. At a fixed ratio, the number should go up.
When compared to other high performing economies, these debt levels are still quite low. Japan’s debt-to-GDP ratio is 221%, Singapore’s is 155%, the USA stands at 119%, the UK at 104%, and France at 93%, – I could go on. All these countries have functioning economies with no clear signs of armageddon on the horizon. So, what effects could high debt actually have?
You may have heard Morrison frequently tout the importance of maintaining Australia’s AAA credit rating. A credit rating is an indicator of a government’s potential ability to pay its debt back. The higher it is, the lower the interest rates will supposedly be. It’s true that a country like Japan has a lower A+ credit rating, but despite Singapore’s enormous debt-to-GDP ratio they still hold a AAA credit rating. Research from the University of South Australia found that while a low credit rating tended to increase interest rates for some countries, it didn’t for a specific kind of economy – the monetary sovereign.
Australia is a monetary sovereign. That means that we issue and collect taxes, borrow money in our own currency and that our currency is not tied to the value of gold or some other currency. You might have heard the term ‘money printer go brrrr.’ If we take on debt, we can print the money required to settle any debt, including any interest repayments. So, at least when it comes to credit ratings, lenders don’t think debt is much of a problem – they love Aussie debt. If debt doesn’t matter for all the reasons it’s supposed to, what does?
The keen eyed may be starting to think “well, if the Australian government can just print as much money as it wants, doesn’t that make the currency worthless?” This is where my assertion that other economic indicators are more important comes in. The big one is economic productivity. Australian dollars are primarily used to purchase goods and services and pay taxes. So long as there is faith that the Australian economy offers desirable goods and services and the government collects taxes, people will want Australian dollars.
When we have a greater employment level we have more goods and services being produced. The assumption with capitalist economies is that they will always grow so there will always be a reason to hold Australian dollars. It’s only when our offerings decrease relative to those on the world stage that people get concerned about its usefulness.
So to combat the decrease in usefulness we should do what seems unintuitive to the so-called debt hawks – spend more. There are over 560,000 unemployed people in this country and 880,000 who would like more hours. This is a tremendous waste of human potential that could be addressed with well-paying public sector jobs. If these jobs are created in strategic areas that will fortify the sustainability of our economy, then investors will always purchase Australian debt. We won’t default because we can print our way out and we won’t collapse as an economy because we can always make productive contributions to the global capitalist economy.
So, the next time Labor lambasts the Coalition for blowing out the debt, remember the point is moot. And when the Coalition complains about a Labor government that can’t stop spending, remember it’s that increased employment and infrastructure that means Australia will always have something to offer.