Just as it is internationally, the issue of public debt is top of the Australian political agenda. This may be hard to perceive, though, against a background of domestic unanimity: all parties (Labor, Liberal-National and Green) are agreed on the need for deficit reduction and austerity.
Discussion is limited to when and how quickly the expenditure cuts must be made. The Coalition says 2012; the ALP says 2013; the Greens say they too ‘want to get out of the red, back in to the black’, but don’t name a date.
In reality, there can be no saving without a corresponding rise in borrowing elsewhere. The sum of financial assets is zero: one person’s thrift implies another person’s debt.
So the public debt can’t be erased, nor the government move into surplus, without some other sector of the economy moving (in this case further) into deficit. But the political parties are silent on whose assets should be run down to compensate for the reduction in state debt.
As a simple matter of accounting, the government’s financial balance (receipts minus expenditures) and that of the private sector (firms and households) will sum to equal the foreign sector (current account) balance.
Firms’ net savings + household net savings + government surplus = trade surplus + net overseas income
In a country running an overseas deficit (as Australia does), the firm sector, households and/or the government are net borrowers.
From roughly the early 1990s, the Australian economy settled on a new model of growth, involving a sharp polarization of income with high, debt-financed consumer expenditure. Banks channelled profits from overseas into the household sector, i.e. consumer credit and mortgages.
There are two surplus sectors in the above figure: finance and overseas.
The public debt is thus nothing more than a liability to the (domestic and overseas) rentier class, for whom it is correspondingly a financial asset. Do the political parties propose to diminish these assets, say through heavy taxes, inflation, a debt jubilee, or running a trade surplus?
No: the first three policy options are strictly forbidden; while a rundown of Australia’s capital stock and productive capacity since the 1980s makes a trade surplus unlikely.
A closer glance at the private-sector accounts suggests how the planned reduction in state borrowing is supposed to be made up.
As we can see, company borrowing is still quite high, but it is being used to pay down debt and reduce the stock of equities outstanding. So the likelihood of firms being able or willing to acquire masses of new debt to fund investment seems small.
If the private sector as a whole is to save less (to compensate for the government’s saving more), this can only occur by deepening household indebtedness.
Cutting public-sector wages or firing government employees (Gillard’s ‘hard choices’ and ‘unpopular cutbacks’, Abbott’s ‘trim’) will help shift the deficit from the state to the household sector.
But this is no solution. Unemployed workers will be forced either into debt, or to run down any financial holdings. The resulting fall in consumption will pass the deficit on to the next sector: firms, which will react by cutting wages and laying off employees. The subsequent fall in tax revenues and rise in unemployment claims will return the mess to the government. Post-2007 events in the Atlantic economies show that growth in consumer credit, and the indebtedness of the lower classes, have limits to their extension. As the level of household debt rises, so does the incidence of default, and the unsustainable process soon comes to a halt.
So, as they’re fond of repeating, Australian state managers face the same problem as their North American and European counterparts.
And, on a national level, solutions of a sort do exist: public debt can be reduced by currency devaluation and export surplus, unlikely as these seem here. But for the whole world this is by definition impossible. The underlying issue – the flipside to public debt – is growth in the financial assets of the international rentier class, and an excess of savings beyond the needs of industry and state.
As shown previously, this problem is likely to proceed in lockstep with the maturation of capitalist economies.