Costello: government has given up paying off debt

By Tom Burton

May 11, 2017

The federal government has “given up” paying back debt and it will take 50 years to pay back Commonwealth debt according to the chair of the Future Fund and former Coalition treasurer, Peter Costello.

Costello told a PwC breakfast briefing yesterday that spending is now permanently locked in at 25% of GDP with the government relying on tax increases to bring the budget back to surplus.

He said this would expose the government if interest rates return to more normal levels, or resource prices returned to longer term norms. He predicted the banks would pass on the new bank levy to customers and said the levy had blindsided the banks, revealing their real level of influence and the quality of their relationships in Canberra.

As treasurer between 1996 and 2007, Costello oversaw a ten-year debt reduction program, with spending reduced to 23% of GDP. This saw the Commonwealth go into net debt and use the proceeds to create the Future Fund. The Future Fund was established to cover the large superannuation liabilities the federal government has.

Costello said he was pleased the Future Fund would be contributing about half of the expected surplus in 2020-21.

Since the initial contributions of $60.5 billion to the Future Fund, the average return has been 7.7% per annum. The Future Fund has since more than doubled its worth to $130 billion.

The Budget affirmed the government would delay drawdowns from the Future Fund to allow it to build its assets to fully cover the government’s superannuation liabilities.

Asked why the Commonwealth was not paying back its ‘overdraft’ Costello said: “Because it has given up.”

“Net debt is 20%. We are in exactly the same position as we were in 1996. If you are going to pay back 20% over 10 years you have to have a 2% surplus for 10 years, 10 times two,” Costello said.

“If you are going to run a 0.4% surplus and try pay it back, it has got to be 50 years. It would take 50 years to repeat that effort on the level of surplus the government is now projecting.

“We all know it won’t be done and that is why I say the government has decided that this debt will be carried permanently.

“It has made an attempt to say, well, don’t worry because some of it is good. We weren’t really told how much of it is good.”

Bipartisan agreement not to reduce debt

Costello sees a “new spirit of bipartisanship in relation to fiscal policy in relation to this budget”.

“Nobody now is talking about paying back debt. The assumption in these budget papers is the debt that has been run over the last decade will be there forever.

“We might be talking about stabilising government debt, but we are certainly not talking about paying it back.

“Go back to 2014, the Hockey budget, the attitude was we have to pay back this debt, we’ve got to deliver big enough surpluses so we can start repaying debt.

“The surpluses such as they will be coming out of this budget are not enough to pay back debt and never will, and so the first thing you have to take out of this is the Commonwealth will be permanently indebted.

“The plan will be, I think, that as the economy grows, that debt as a percentage of the economy will fall. It is not going to be paid back. We will just leave it there.”

Main risks for the Budget

“That is fine while interest rates are at historical lows … you can service debt. Commonwealth long term bond rates, when the global economy normalises, will increase and that’s when your debt servicing problem starts to creep up on you.

“We are in a position after 26 years of continuous growth. Where would we be if we had had a recession? This has been a run up in debt on a growth economy, in fact on very favourable terms of trade. Where would we be if terms of trade went back to, say, 2000?

“When I did my first budget the iron ore price was $13-a-tonne. Now we think $50-a-tonne is low. If that runs against us we are now much more exposed than we were in 2006.

“That is what I would say are the great risks in this budget. Fine as long as you assume growth is going to go on to 27th year, 28th year, 29th year, 30th year, but history tells us economies don’t grow forever.

” … if we were to go into another downturn, another downturn like 2008, and we wanted to blow our debt again we would be much more exposed than we were in 2008.

“That is where I would say the big risks are coming, the big risks. In 2008 we went in with a triple-A credit rating and no debt, zero debt, money in the future fund, a net asset position.”

No policy logic to the Medicare and Bank levies

“The increase in the medicare levy is just an increase in tax rates.

“Medicare is just another addition to your marginal tax rates. There is no logic to it. It does not fully fund Medicare and it will not fully fund NDIS … but it will fund consolidated revenue out of which those two things are funded.

“The bank levy has no rhyme or reason. There have been levies in the past for financial stability claims, this is not going to be directed towards financial stability claims. It is simply purely a revenue raiser.

“You have got to get your revenue from somewhere and I suppose banks are big and mean and ugly so you might as well get it from them.”

Banks predicted to pass costs on to customers

“Ultimately costs will either be borne by the customer or be borne by the shareholder and if I know the Australian banks they will make sure these costs are borne by the customer.

“There will be a lot of talk about making sure costs are not passed on, but it is very very hard to monitor interest rates. They will claw it back in my view.

“The banking interest was completely blindsided by this, which shows you how much influence they have in Canberra and how well plugged they are in Canberra. Totally blindsided, didn’t know it was coming, didn’t know how to react.

“It does say something about the banks and it does say something about their lobbying capacity in Canberra and the government knows that. The government was not going to repeat the mining tax because one thing we know about the mining industry is that it is well organised and will take you on.

“One thing we know about the banking industry is by and large they protect their profit margins by getting it out of customers and by and large they have no real capacity to influence the public whatsoever.”

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