It’s not only refugees who are about to swamp us but also governments debt. The need to return the federal budget to a surplus is an article of faith by every politician running for office, all of the mainstream media and most economists. It’s only a question of how quick we proceed.

Are we being told the truth, the whole truth and nothing but the truth?

The alleged problem

A recent report on tax reform by PwC one of the leading accounting firms http://www.pwc.com.au/tax/assets/Protecting-prosperity-22Jul13.pdf contained a preamble about why we needed tax reform, essentially to avoid mounting government debt. Australia’s challenge was summarised as follows.

After 22 years of continuous economic growth, Australia now faces the risk of falling incomes and increasing government debt. PwC estimates that the combined annual deficits of Australian governments will rise:

• from $27.4bn (1.9% of gross domestic product [GDP]) in 2011-12 to $213.5bn (3.5%) by 2039-40and to $583.1bn (5.9%)by 2049-50.

And our governments’ debt levels as a proportion of GDP will rise:

• from 12.1% in 2011-12 to 32.9% by 2039-40 and to 77.9% by 2049-50.

These trends are unsustainable as the population ages. Australian governments risk not being able to meet the key needs of our community and a further slide into debt. And higher debt at the Commonwealth level would mean that another shock like the GFC in the next few years could see its debt climb to 30% of GDP by 2025-26.

PwC produce a graph ( above ) to highlight the problem ahead.

Looks pretty bleak. It’s good to see the inclusion of both Federal and State debt. But capitalising the interest simply exaggerates the problem. Maybe that’s the intention, to draw attention to the issue?

The report was a pretty reasonable coverage of the tax reform issue, although predominantly a cut and paste from the Henry report. However it was a little disappointing that having flagged debt as a jumbo problem there was no attempt to explain why from a macro accounting perspective …

The inescapable ex post rule of macro accounting is that one person’s liability is another’s asset. If the government sector has financial liabilities then the private sector must have a corresponding financial asset.

Most people who comment on our debt problem have never bothered to understand this unassailable fact.

Negative net worth of $161 billion. It may look like impending insolvency but nothing could be further from the truth.

Before we scare the horses maybe a quick glance at a short form consolidated balance sheet for all levels of government in Australia may be warranted.

The negative net worth of the Australian government is further confirmation of the problem of vertical imbalances between levels of government in our federal system. Not only is there the more familiar vertical fiscal imbalance between levels of government where the Australian government raises more tax than it spends and the States do the reverse, but much of what is borrowed by the Australian government is spent by the States. Any talk about Australian government debt inevitably requires a consideration of the States’ situation.

Burdening our grandchildren?

But then there’s the hoary old chestnut…… if we don’t pay off the debt we’ll be saddling our children with an insufferable burden. That’s just emotive nonsense. In any event the amount of interest is quite low both in $ terms and relative to the amount of other transfers. Furthermore in the future, regardless of the level of debt assuming it is not too large that it inhibits economic activity as private debt has done in the post GFC era, our children will be faced with exactly the same decision as we do. Our entire national income is consumed, saved or paid in taxes. Another iron law of macro accounting. How much is paid in benefits, interest or tax is essentially a distributional problem. And as we’ve already observed borrowings are rarely repaid, they are invariably rolled over, and in that sense is more like equity than debt, perpetual tradable securities. It’s the only way the general government funds growing demand for public goods and services.

Just to explain national income a bit more …

Summary

· Bob Menzies ran 17 consecutive budget deficits.

· The Howard Costello surplus fetish simply shifted debt to the private sector.

· NAB’s CEO Cameron Clyne recently expressed the view that Australia needs more public debt.

· Government debt is like a perpetual tradable security without which public assets would be much lower

· Private debt is more of a problem than public debt. It is not only much higher as a % of GDP but it has to be repaid.

Australia’s vital conversations, it seems, are interrupted by elections. Australia is in a wonderful position to capitalise on its strong balance sheet. However never has there been such a complete lack of understanding of basic macro accounting truisms amongst those chosen to represent us.

Read the full brilliant analysis, including full links, John Lawrence’s Tasfintalk, here

Is it true we live in a society and not an economy?: Discussion and Q&A with economists Graeme Wells and Senator Peter Whish-Wilson and Corporate Governance Lecturer Tom Baxter. Watch here

Tony McCall, The Conversation: State of the states: Tasmania Tasmania has a median age of 40, the oldest and fastest-ageing population in Australia. The enterprise opportunities attached to ageing need to be explored with urgency. Tasmania is closer to Antarctica than the markets of Shanghai. And Bass Strait is one of the most expensive water crossings in the world for its size. Tasmania needs a coach who understands that the regional development game has changed; a coach with a three point strategy: learn how to play, then how to win, and finally, expect to win. A Tasmania that expects to win – rather than receive a handout or resort to social experiment status – could take some stopping. Just ask Nick Haddow. Here