The debts run-up by profligate governments are about to cost us dearly

The Covid-induced recession has been used across the world to justify massive increases in debt-funded government spending, as well as cheap easy credit.  Such actions have definitely helped businesses survive in the short term, though the sums paid out have been massive.  Crown Casinos, for example, reported receiving $111 million in Jobkeeper subsidies from March to June 2020, while (the also loss-making) Qantas reportedly pocketed around US$780 million during 2020.  Even the smallest businesses on Jobkeeper have received thousands of dollars a month, and countless businesses have had the taxpayer cover most of their wage costs.

Tax-free "cash flow boosts" of between $20,000 and $100,000 were also paid to virtually all small and medium-sized businesses with employees.  They got the money automatically when they lodged their BAS, and didn't even need to apply.

The orgy of government spending, however, is problematic because you cannot keep unprofitable businesses afloat indefinitely, interest rates may not stay low forever, and public debts (effectively deferred taxes) have to be repaid by someone.  Many people simply saved their stimulus handouts (the household savings rate for Australia soared to around 20 percent during 2020), and no amount of stimulus can restart industries, while they are affected by mandatory shutdowns or closed borders.

The biggest problem with stimulus spending in Australia, however, is that a large chunk of the poorly targeted spending was simply a windfall benefit to recipients that didn't need a subsidy.

The $130 billion Jobkeeper programme (now revised down to $90billion) has been the largest single stimulus element, yet we now know that many big company recipients had been making record profits.  Toyota announced it will voluntarily pay back $18 million, while Cochlear opted to repay $23.1m it received in the December half.  So far some 16 ASX-listed companies have repaid $126m of the benefit.

You can be assured, however, that the majority of un-needy recipients will simply keep a low profile and pocket a pile of money.

Car dealer group Eagers Automotive received $129.6m in JobKeeper between March and September.  It recently declared a full-year profit of $156.2m.  Clothing group, Premier Investments, which received $68.7m in Jobkeeper subsidies after delivering a record $138m profit for the 2020 calendar year, has not (along with Eagers) indicated any willingness to pay back the money.

It has also been alleged that some businesses set out to game the scheme by shifting revenues or generating unrealistically pessimistic forecasts, though the vast majority of recipients operated within the spirit of the scheme.

It is extraordinary that there is minimal political fuss over the huge waste inherent in Jobkeeper, a scheme which has channelled billions directly from taxpayers to business profits.  (Rather than criticising the scheme, the Opposition amazingly has kept calling for its extension.)  Contrast this with the fuss over the (small in comparison) $102.5 million Community Sport Infrastructure Grant Program.

Jobkeeper outlays are nearly one thousand times the size of Community Sport Infrastructure spending.  Furthermore, under the latter scheme the money did make it through to community groups (albeit less deserving ones in some cases).  Under Jobkeeper, a lot of employers have pocketed huge sums of public money for keeping on employees they would have retained anyway.

The notion of governments borrowing at artificially low interest rates over the long term also smacks of belief in a "free lunch".  Undesired likely future side-effects include renewed inflation (especially of asset prices), income losses for savers, and crowding-out of non-government borrowing.

Many Australian governments also seem to believe that they "might as well be hanged for a sheep as a lamb" and have added (uneconomic) pet projects to the borrowing binge.  For example, the Australian Government brought forward its unaffordable income tax cuts, increased defence spending, and is going ahead with expensive ill-considered schemes like Snowy 2 and the Inland Rail.

In short (certainly in Australia) any notion of fiscal rectitude simply went out the window in 2020.  Not only that.  Unfettered public spending had been going on in many jurisdictions well before anyone heard of Covid 19.

A domestic example of what can happen is the case of Norfolk Island, which in 2014 was found by the Australian National Audit Office to be "insolvent", in part reflecting a lack of proper financial controls and poor financial management practices by the Norfolk Island Administration.  Consequently, the territory had its self-governing status removed, and was bailed out by the Commonwealth.

In the 2015-16 budget, the Australian Government provided $136.5 million (more than $75,800 for each of Norfolk's 1800 permanent residents) over the forward estimates.  The recent 2020-21 Federal Budget allocated another $55.6 million of new funding for Norfolk Island over four years from 2020-21.  While the island's problems did not mainly result from excessive borrowing (but also from a combination of a collapse in tourism and an inadequate revenue base) it still illustrates what can happen when a jurisdiction can't or won't put its finances in order.

Turning to the states and territories, the Northern Territory (NT) is in by far the worst financial shape and is now considered by many to be a "basket case".

NT government revenue for 2020-21 is budgeted at $6.3 billion while expenditure is $9.3 billion.  Furthermore, the NT does not expect to achieve a surplus for at least the next decade, with forecast deficits slowly declining to $938 million by 2023-24.  The latest NT budget, besides excessive recurrent spending, also included (an unaffordable) $1.75 billion for infrastructure projects.

An independent audit found the NT's financial crisis was largely caused by unchecked spending over successive governments (though the Gunner Labor government took this to a new level).  By 2018 the Territory’s net debt had escalated from $1.7 billion in 2016 (when Labor was elected) to around $3 billion.  Net debt for this financial year is set to reach $8.4 billionbefore escalating to $12 billion by 2023-24, creating a debt-to-revenue ratio of 179 per cent.

The NT has a bloated territory public service of about 21,760, which is nearly as big as the (itself somewhat bloated) ACT public service, which serves nearly double the population.  About 80 per cent of the NT's annual budget is funded by the Australian Government through grants and GST allocations, and the Territory has a very limited "own revenue" base.

The recent NT Budget has forecast that deficits will continue for at least the next decade, with territory public debt expected to double to $16 billion (the equivalent of $65,000 for every man, woman and child) by 2029-30.  Last June, Moody's Investor Services reduced the Northern Territory's credit rating from negative Aa2 to Aa3.

The Territory had sought a Commonwealth bailout, which has not been forthcoming.  Given that the NT government seems to be unwilling to address its financial issues, something drastic (e.g. abolishing its self-government) needs to be done before the situation becomes much worse (though I can't see such action being approved by the Senate).  Arguably, given the NT's extreme dependence on the Commonwealth, it should never have been granted self-government in the first place.

The other Territory, the ACT, has been ruled for 19 yearsby Labor/Labor-Green administrations (who also like to spend, and, what's more, charge the highest household ratesin the country).  While the ACT is also running up debts, being the most affluent jurisdiction in Australia, and having only 3.7 per cent unemployment and an AAA credit rating, it will take a long time before indebtedness becomes a matter of major concern.

Under current projections, the ACT is forecastto face a budget deficit of $603 million this financial year, after a $681 million shortfall in 2019-20.  Its Government plans to take advantage of low interest rates to borrow and spend, spending about $1 billion every year for four years on capital works.  The string of deficits predicted will see the Territory's net debt peak at $7.65 billion ($18,200 per man, woman and child) in 2022-23, after reaching $4.66 billion by the end of the current financial year.

Turning to the states, Victoria and Queensland have experienced the sharpest deterioration in their finances.

The Kennett Government had put Victoria back on its feet following an era of reckless spending under previous Cain and Kirner administrations.  The Bracks' Labor Government had also been relatively disciplined but Victoria has plunged into heavy debt under "Lockdown Dan" (Andrews).

Victoria is forecast to have the highest per capita state debt ($175.5 billion or $23,984 per capita by 2023-24).  It is forecast to havean operating deficit of $23.3bn this financial year, falling to $5.9 billion by 2024.  In 2018-19, public debt was $25 billion.  This climbed to $44 billion in 2019-20.  Debt will quickly triple, rising to $86bn in 2020-21, and $154.8bn in 2023-24 (a much faster rate than any other state).  In December, S&P Global Ratings lowered Victoria’s credit rating two notches from AAA to AA.

Victoria’s lockdowns have eroded the state’s finances and weakened its economy.  Repeated lockdowns have seriously affected the viability of many businesses.  Payments for JobSeeker and JobKeeper (by their end) are set to transfer an average $7000 of Commonwealth money to each Victorian, which is 45 per cent more (on a per capita basis) than dispersed to other jurisdictions.  Victorians will receive almost $11,000 per capita in total Covid assistance from the Commonwealth.

Overall, history seems to be repeating itself in Victoria.  The only thing that might stave-off a Cain-Kirner style economic crisis is the persistence of lower interest rates into the medium term.

Queensland arguably is another stark example of a Labor state government being fiscally undisciplined.

While the Bjelke-Petersen National Party government of the 1970s and 1980s was guilty of cronyism and was very conservative socially, it did run a tight budget.  The Goss Labor government (1989 to 1996) also largely kept the budget balanced.  It increased taxes rather than raised debts.

According to economist Judith Sloan, the fiscal rot for Queensland set in under the Beattie (1998 to 2007) and Bligh (2007 to 2012) governments, when general government borrowing went from $2.7 billion in 2003-04 to $45.5 billion 10 years later.  Under Anna Bligh, in 2009 the state lost its AAA credit rating, with the main driver being additional borrowing, especially for capital outlays.

The Newman government (2012 to 2015) attempted to turn things around but budget cutbacks, big cuts to the public service (14,000), and Newman's style proved too much for Queensland voters.

When the Palaszczuk government came to power in 2015 total government debt approached $80bn (including government-owned corporations).  Despite promises to control the Budget, the Queensland public service continued to grow at an unsustainable rate.  There are now 238,604 full-time public servants in Queensland and the state's wage bill is expected to come in at $26.5 billion for 2020-21.  While other states sought pay freezes, the Queensland Government negotiated a pay rise of more than 3 per cent for its state public servants.  At the same time border restrictions were being imposed that were sending many Queensland businesses broke.

According to the latest Queensland budget, Queensland’s total debt is expected to reach $129.72 billion over the next three years, equating to $25,141 per Queenslander.  The forecast deficit is $8.63 billion for 2020-2021, and is expected to drop to $1.29 billion by 2023-24.  The only consolation for Queensland is that it has kept its state assets largely in public hands.

I won't go through all the other states other than to say that, overall, State government debts are expectedto more than double to nearly $500bn in total within four years (averaging about $18,000 per capita).  NSW state debt is expected to rise to $137bn, or $15,600 per capita, though it must be remembered that the figure would have been much higher but for substantial asset sales.  WA has achieved a $1.2 billion budget surplusthis year on the back of strong iron ore prices.  Net debt for WA is nevertheless forecast to climb by $18 billion over four years to $43 billion.

The Commonwealth Budget has experienced deficits and rising debts more or less continuously since the time of the Rudd Government.  The Rudd Government's stimulus packages across 2008-10 were worth about $67 billion.  In the final months of the Rudd Government in mid-2013, Australia's net debt position was $159.6 billion, and the net debt-to-GDP ratio was 10.4 per cent.

The first Budget of the Abbott Government sought to impose some restraint but its measures were blocked by the Senate so the trend of deficit spending just continued.  The 2019-20 Budget of the Morrison Government promised a return to surplus, but this evaporated when Covid struck.  The 2020-21 Commonwealth Budget (in response to Covid) indicated an expected underlying cash deficit in 2020-21 of $213.7 billion (11.0 per cent of GDP).

Between 2007-08 and 2020-21, Commonwealth debt increased from 4.7 to 42.5 per cent of GDP.  Commonwealth debt per capita increased over ten-fold, from $3,263 to $33,126 in real terms over the period.

Based on the forward estimates to 2023/24, general government (Commonwealth and States) gross debt is projected to balloon from $817 billion in June 2019 (42 per cent of GDP) to $1,755 billion in June 2024 (80 per cent of GDP).  Treasury is now forecasting at least a decade of deficits, with the underlying (Commonwealth) cash deficit assumed to be about $53bn in 10 years’ time.  Commonwealth Government debt will be $1.8 trillion in 2030-31, or 55 per cent of GDP.

The biggest issue with all this debt is that there is little tangible to show for it, and our financial system has lost much of its connection with the real economy.  Official rates of 0.1 per cent are clearly too low (and the RBA is promising to keep them there for roughly the next three years).

Combined with easy credit, low interest rates are creating a boom in asset prices.  There is currently a stampede of investors and home buyers seeking loans, that are bidding up the prices of property and equities.  Interest rates are already coming under market pressure.  Look at recent risesin bond rates in the US, increased interest in fixed interest loans, and tighter restrictionson home lending recently announced in New Zealand.

Eventual higher tax burdens, inflation, and at least some rise in interest rates are a near certainty.

In the UK, Chancellor Rishi Sunak is raising taxesto the highest level since the 1960s.  Mr Sunak announced that from 2023 corporation tax would rise from 19 to 25 per cent for the most profitable companies.  He also said that the basic rate and higher rate income tax thresholds would be frozen from next year, raising an additional £19bn.

While the timing of Australia's public spending binge was roughly right, Joe Biden’slandmark$1.9 trillionstimulus package in the US is a massive pork-barrel that comes too late, with the US economy already recovering strongly.  Elsewhere, those countries that were in financial difficulty before Covid, are now at increased risk of sovereign default.

In this country it has yet to be widely recognised that the middle classes will pay dearly for wasteful government spending.  This is because, given that half of Australia's families pay no net tax, those that do are responsible for repaying or servicing a disproportionate share of public debt.

In effect there is perhaps an average (hidden) $100,000 or so of public debt that typical middle class taxpayers will each have on their shoulders, most likely to be extracted by bracket creep, increased state taxes, and perhaps a higher rate of GST.  Savers will also be big losers, even though it is likely that interest rates will rise somewhat from current almost zero rates.  A prolonged period of negative real interest rates is still likely to persist in order to indulge debtor governments across the world.