While most Australians were tanning themselves at the beach during their summer breaks, the federal opposition and the Gillard government traded blows over what will be a key political issue this year: financial management.
Opposition finance spokesman Andrew Robb depicted Australia's gross public debt growth as ''Icelandic'' in scale, consigning taxpayers to significant fiscal risks in the event our terms of trade moderate as a result of a global economic slowdown.
Pointing to recent economic growth and low unemployment, assistant treasurer Bill Shorten dismissed the claim of profligacy in government borrowing, stating our only connection with highly indebted Iceland is that ''we are both an island''.
At home, government ministers have made a political virtue of pointing to Australia's relatively low levels of public sector debt compared with Europe and the US, whose debts in some cases exceed the size of national economies and which have experienced recent credit rating downgrades for their sovereign bonds.
International Monetary Fund financial statistics confirm the low proportion of debt as a percentage of GDP for Australia compared with other advanced economies. However, the data also shows Australia has engaged in an activist approach towards accumulating public sector debt.
From 2007, one year prior to the global financial crisis, to 2010, the inflation-adjusted gross public debt of Australian federal, state and local general government sectors increased by 131 per cent to $253 billion, or 21 per cent of GDP.
This figure places us in the top four of the international debt splurge during the last quarter of the past decade, following Ireland (gross debt growth of 213 per cent), Luxembourg (189 per cent) and Iceland (181 per cent).
Governments have been able to significantly increase their borrowings, partly through their efforts in relaxing legislative constraints.
Since late 2007, the commonwealth has raised its legislated gross debt ceiling from $75bn to $250bn, with the prospect of more increases in the near future as the dollar amount of commonwealth securities on issue approaches the upper limit.
When relatively liquid financial assets of Australian governments, including cash and their holdings of bonds of other governments, are taken into account, our net debt position at first glance looks eminently more appealing with the net debt-to-GDP ratio standing at about 4 per cent in 2010.
That said, the argument that governments across all levels in Australia during recent years have engaged in a debt spree is sustained when it is recognised we had an overall negative net debt-to-GDP ratio prior to the GFC.
These figures are also generous to present governments in that they understate the level of sovereign debt, as they do not include the borrowings of semi-autonomous government trading enterprises and other off-budget public sector entities.
The debate over the actual magnitude of debt is situated within a broader discussion concerning how and to what extent public debt — and its size — matters for a country's overall economic performance.
Proponents of a greater role for government in economic activity, including Keynesian economists concerned with stabilising macroeconomic aggregates, have recently made two key arguments to delegitimise concerns about the use of debt to finance government expenditures.
The first is that the economic effects of government borrowings are benign for as long as economic activity remains subdued, implying crowding out of private investments through higher interest rates is unlikely to materialise as a major concern.
However, there are numerous ways in which governments crowd out private economic activity, such as in instances where debt is being used to finance public consumption where the economy-wide benefits, if any, are exhausted within a short period of time, rather than financing long-lived productive assets such as economic infrastructure.
It is worth noting that during the GFC, Australian governments conceded debts were being raised to cover shortfalls in taxation revenues and hence maintain consumption, and in recent years the quantum and rate of growth of borrowings by the general public sectors of all governments has exceeded their capital investments.
While it is conceivable that governments have dedicated borrowed funds to their growing array of special economic and social infrastructure funds, the ability of governments to raid these funds for recurrent spending purposes poses an ever-present threat to the efficient use of funds, and also to political accountability more generally.
Governments, just like households and businesses, need to meet their gross debt obligations, but unlike households and businesses, who repay principal and interest on loans through incomes acquired through mutually consenting market transactions, governments will compulsorily impose taxes that impose efficiency and other burdens upon households and businesses.
Even in cases where governments use borrowed funds to invest in activities yielding future streams of benefits, the growth in the size of government that public debt facilitates implies the displacement of private sector decision-making by less-efficient political decisions over resource allocations.
Second, arguments are made that the incidence of public debt should not be a matter for policy concern since we owe the debt to ourselves in our capacities as members of the community.
However, the domestic or foreign bondholder who voluntarily purchased the government security is not necessarily the same individual as the domestic taxpayer who bears the burden of the debt.
This point is particularly pertinent in the cases of existing minors yet to enter the workforce and pay taxes, and indeed unborn future generations, who have not politically consented to the additional tax burdens resulting from governments' debt-financed public expenditures.
Since 2007, Australia has joined with other advanced economies in a co-ordinated splurge in government borrowing, increasing public sector size while enervating the productive private sector and risking the living standards of future generations.
To argue that we are better off because others are sinking in a fiscal sea of red ink faster diverts our focus away from the common underlying cause of government overspending that requires remedial attention, rather than empty promises and intergenerational buck-passing.
With Opposition Leader Tony Abbott differentiating himself from the Rudd-Gillard deficit-and-debt record by signalling an intention to reduce the size of government, securing a reputation as to who will be the best financial manager is now well and truly up for grabs.
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