By guest contributor Ken Atchison, Principal, Atchison Consultants
Both the Federal and Victorian governments have released budgets in May with deficits projected well into the future.
Budget deficits do matter. Ultimately a decline in the standard of living for all Australians and, especially, all Victorians, will occur from flawed fiscal management reflected in persistent budget deficits.
Government deficits emerge when spending occurs today for the benefit of individuals today. Responsibly for payment though falls on future generations. Deficits which arise through the stabilising feature of spending commitments in a recession may be acceptable. Today, deficits have arisen through Governments imposing draconian controls over activity by the Australian population.
As a result, under the Federal government budget, Australian net government debt will rise to $980 billion in 2024/25, being 40.9% of GDP as shown in Table 1.
Victorian debt, under the 2021 State budget, will rise to $155 billion in 2024/25, being 33.8% of GSP. Adding Commonwealth debt on top takes aggregate government debt for Victorian residents to approximately $400 billion or 74.7% of GSP, a debt of $60,000 per person in Victoria. It is a heavy responsibility for taxpayers in Victoria, one solely imposed by governments.
The relevant variables for debt servicing are relatively straight forward.
Increased private sector activity will drive higher government revenue. Population growth will also drive higher government revenue. With border controls in place, population growth will be limited, if not negative. In Victoria, the population declined in September quarter 2020 by 16,000. Private sector growth will be limited, reflecting restraint on population growth and international students and tourists.
Government spending and RBA policy is providing immediate stimulus. Governments imposed restrictions on the private sector in 2020, driven by the pandemic. Now they are stimulating the economy by spending funded by debt and low interest rates. This represents steps towards a command economy. The extent of rebound in private sector growth is uncertain.