How we Should Embrace the “Debt” and the “Deficit”
Credit card debt can push you into poverty. For many, a mortgage is a lifelong commitment. Leverage in the private market sends companies into bankruptcy, and occasionally, whole nations into years-long recessions. Deficits are scary, and that’s why we’re taught to not spend beyond our means. But Australia is different.
If our government wants to spend beyond its means it has two options
1. To borrow money
Or
2. To create money
I will address how each of these functions of monetary autonomy do not “indebt” the nation, but rather, exist to serve it.
The service of “debt”:
While government spending is usually motivated by money creation, the elected government still sells bonds and increases the public “debt”, often to the RBA [26].
Currently, the Australian government currently holds close to one trillion AUD in debt, a number set to increase to 1.2 trillion by 2025 [9]. However, this “debt” has more functions than private debt. Like taxation, bonds remove money from the economy (which is recreated at maturity). However unlike taxation, the issuance of bonds creates a government asset equal to the value of its “debt”. Money.
Money should be described as government asset, because a government can recall all its currency at any moment in either a targeting manner, by increasing taxation or an untargeted manner, by selling bonds or raising the cash rate.
When a foreign entity wishes to buy bonds (increase our national debt), it must first trade its own currency, for our currency and then purchase a bond in order to have the privileged access to our risk free rate. This transfer of currencies encourages trade and export, and at bond maturity, the entity has the option to return AUD to its home currency, or to continue doing business in AUD. The creation of government “debt” is itself a public service that inherently stimulates trade and prosperity, even before further capital is redeployed in a targeted manner.
Both bonds and cash have very similar functions. Bonds and the ‘risk free rate’ represent a governments borrowing cost, while AUD is a government asset given to society at a lower (zero) lending rate.
I would argue that national “debt” is described with the wrong words. Unfortunately, I am unaware of a more suitable word than debt. But what this trillion dollar number represents is the amount of Australian dollars our government has supplied to the wider world through bonds. One could argue that there is a great advantage that investors – individual and institutional – have the ability to earn a return at a risk free rate. Perhaps you yourself feel some patriotic urge to lend the government your money and entrusting that it will be returned, or are comforted by the notion large portions of your superannuation earn a return with virtually zero risk.
If debt is the wrong way to describe the supply of dollars we have provided the world, then “deficit” is the wrong way to describe the difference between what is spent and how much tax is collected. As discussed in Part One, the status of AUD as a fiat currency controlled by our own central bank makes our nation very different to a firm or a household.
The service of the budget “deficit”:
The word deficit may, wrongly, imply some risk of default. We have no source of conventional “income”. Taxation is a mechanism that validates AUD and provides space in the economy for the public service. Australia’s “expenses” are made independently of what this “income” figure is.
These “expenses” are made automatically every time an Australian gains disability, unemployment or pension support, a HECS debt is taken out, or the costs of an infrastructure project are paid.
I can stop paying my rent and be evicted from my house. The government can’t stop paying for public services, no matter how expensive, unless they are written out of law. When you receive federal dollars, they haven’t been cycled through our taxation system, they have been promised by the government, guaranteed by the RBA and created by the constant tweaking of the RBA’s balance sheets. If this system fails it imposes immense damage on a society that expects governments to stay true to their word. This system shouldn’t fail because it is illegal for it to do so. If it does fail we should admonish the politicians who possess irrational, harmful fixations on budget deficits. The Robodebt scheme is a prime example of an elected government failing its duty to pay what it promised the public, in the name of cost saving and deficit constriction. Perhaps unsurprising that its inception stems from a future Prime Minister who ran an election campaign founded in macroeconomic illiteracy [10].
26. Parliament; address=Parliament House, Canberra corporateName=Commonwealth. ‘Australian Government Debt’. Text. Accessed 12 September 2022. https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202223/AustralianGovernmentDebt.
9. Commonwealth Debt. https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202122/CommonwealthDebt. Accessed 14 Aug. 2022.
10. Morrison, Liberal (10 May 2015). “The Coalition’s Policy for Better Management of the Social Welfare System” (PDF). Australian Government Budget 2015/16. Archived (PDF) from the original on 9 February 2021. Retrieved 10 May 2015.