Criticism of spending cuts announced in the budget has triggered a Coalition campaign to persuade the public that the proposed changes are needed. Central to the sales pitch is the argument that Australia needs to reduce its debt.
Treasurer Joe Hockey, one of 33 Coalition members to raise the topic of Australia’sinterest billover a single week in May, told Parliament that Labor was to blame. “At the moment we’re paying a billion dollars a month – one billion dollars every month in interest, in interest on the debt that Labor has left,” he said in Question Time on May 26.
Is the Government really paying $1 billion a month on its debt and is that payment only because of what Labor did during its time in government?
ABC Fact Check finds out.
What is government debt?
If a state or federal government needs to raise money either to pay for specific projects or to cover any shortfall between the government’s annual revenue and expenditure – known as the deficit – it will issue bonds or notes.
These operate like a loan, where the government agrees to pay the person who buys the bond or note the full purchase price at the time the loan matures, usually two, five, 10 or 15 years from the date of issue. The government pays interest on the loan at fixed intervals, usually twice a year. The initial purchaser of the bond or note can sell it on the open market at the prevailing price, which is based on traders’ views of the likely direction of the economy.
According to the 2014-15 budget, Australia’s interest-bearing liabilities in the year to June 2014 are expected to reach $358 billion. About 97 per cent of these liabilities are Commonwealth Government Securities (CGS). These are Treasury bonds, Treasury indexed bonds and Treasury notes.
At the moment, there are $329 billion worth of Commonwealth securities on issue.
What is the interest owing on outstanding debt?
The federal budgets include details of how much interest the Commonwealth pays on its debt each year.
The 2014-15 budget shows $13.2 billion will be paid to service CGS liabilities for the year to June 2014, and $13.5 billion next financial year, rising to a projected $16.4 billion by June 2018.
HSBC chief economist Paul Bloxham told Fact Check that a generally accepted way to find a “back of the envelope” calculation of interest payments on government debt is to use the interest rate that the market sets for the 10 year Treasury bond.
Mr Bloxham said the interest rate on securities is determined by the “active, deep and liquid” bond market. Interest rates reflect a range of things, including Australia’s AAA sovereign rating, he said. Without this, the interest rate on debt would likely be higher.
In the market, Commonwealth securities are traded by investors including fund managers and foreign reserve managers.
The government always pays fixed interest rates on the notes and bonds it issues, which are set at the issue date. Pricing for new issues is affected by market movements.
The market rate for the 10 year Treasury bond is currently about 3.7 per cent a year. Using Mr Bloxham’s back-of-the-envelope method,3.7 per cent of $329 billion gives an annual interest bill of $12.2 billion, or $1 billion a month.
A spokesman for the Australian Office of Financial Management (AOFM), which manages the government’s debt portfolio and is responsible for issuing securities, confirmed that annual interest payments equate to slightly more than $1 billion a month.
He said Mr Bloxham’s calculation was a reasonable rule of thumb for calculating interest, mainly because the 10 year bond market rate is fairly similar to the average interest cost which the Commonwealth pays on all its securities currently on issue.
Both Mr Bloxham and the AOFM spokesman said that the complex way of determining interest payments would involve going through each of the 20 bonds and notes on issue and calculating the annual interest payable, including for the more complex inflation-linked bonds, of which there are six.
“It’s a moving feast,” the AOFM spokesman said, referring to the fact new bonds and notes are being constantly issued, while others are maturing throughout the year. Two large bond lines mature this year, on June 15 and October 21. He said in any event, the calculations would end up very close to the figures published in the budget.
Whose debt is it?
When Labor’s Paul Keating lost the federal election to the Liberal Party’s John Howard in 1996, about $110 billion of Commonwealth debt had been issued as part of the Labor government’s policy program to lift the country out of recession.
At that time, Commonwealth securities represented nearly 21 per cent of the country’s gross domestic product. In the 2013 financial year it was 17 per cent.
By the time Mr Howard was voted out of office more than a decade later, the Coalition had returned the budget to surplus and lowered the ratio of CGS to GDP to 5.4 per cent.
“As a result of 10 years of strong economic management, net debt was eliminated in April 2006,” the Coalition said in its 2006-07 budget.
Even during periods of surplus, the AOFM will issue securities in order to maintain liquidity in the bond market, meaning gross debt is never entirely eliminated.
Running a budget in surplus means the government can pay interest on its CGS liabilities from its surplus. When the budget is in deficit, interest is paid from government borrowings.
When Labor’s Kevin Rudd took over as prime minister in 2007, there was $59 billion in Commonwealth securities on issue. Under Mr Rudd, the ratio to GDP continued to fall for another three years, hitting the lowest point of the past 30 years.
The amount of Commonwealth securities on issue almost doubled in the year to June 2009. It has continued to rise as successive deficits have been recorded.
When the Abbott Government came to power in September 2013, there was $270 billion in Commonwealth securities on issue.
The growth in public debt reflected the impact of the sharp slowdown in the economy at that time – which hit the tax take hard – and the economic stimulus policies the Labor government said were implemented to counteract the global financial crisis.
Deficits that accrue during the term of a particular government reflect the state of the local and international economies, and are also affected by policy decisions made by previous governments.
In a post-budget speech on May 20 this year, Treasury secretary Martin Parkinson produced a chart showing that every budget over the 12 years from June 1998 loosened fiscal policy, that is, increased spending and decreased tax revenue.
Of those, 10 budgets were delivered by the Coalition and included eight years of income tax cuts.
How much more debt has been issued since the election?
The AOFM issues securities in response to the budgetary position provided to it by the Government.
Between Labor’s last budget handed down in May 2013 and Mr Hockey’s first budget a year later, the AOFM has responded to fiscal changes byissuing $31 billion morebonds than first anticipated.
“The AOFM develops an issuance program each financial year based on the Australian government’s expected financing requirements as set out in the Budget and as updated in the Mid‑Year Economic and Fiscal Outlook,” the website says.
“It does so with the objective of meeting the financing requirement, while having regard for the ongoing cost and risk of the debt portfolio and broader development of the Australian debt market.”
- On May 15, 2013, the day after Labor’s last budget, the AOFM said in an operational note that it expected to issue about $54 billion of new bonds over the 2013-14 financial year.
- By August 5, 2013, when Treasury released the Pre-Election Economic and Fiscal Outlook, the AOFM said that amount had increased by about $10 billion to $64 billion.
- As of October 23, 2013, six weeks after the Coalition came to power, the AOFM said it would issue between $74 billion and $75 billion in bonds.
- By December 18 2013, a week after the Coalition’s Mid-Year Economic and Fiscal Outlook was released, the amount of bonds expected to be issued had risen to $80 billion.
- After the May 2014 budget, the AOFM estimated it would have issued $85 billion worth of Treasury Bonds and Treasury Indexed Bonds for the 12 months to June 2014.
These changes reflect successive increases in the projected budget deficit.
Since the Coalition came to power, various members of the Opposition, including shadow Treasurer Chris Bowen, have claimed that Mr Hockey has increased the country’s projected deficit by about $68 billion over four years. Fact Check previously found that claim checks out.
The $68 billion represents increases to annual deficits over the current financial year and for the three years of the forward estimates. In the current financial year, the increase since Labor left office was estimated at $16.9 billion in the mid-year document released in December and $19.7 billion in the recent May budget.
Of the total Commonwealth securities on issue, that $19.7 billion increase on the Coalition’s watch represents 6 per cent. Mr Hockey can argue that most of the remainder is Labor’s legacy. However, when Labor took office in 2007, it inherited $59 billion in Commonwealth securities from the Howard government.
This means of the current securities on issue of $329 billion, Labor budgetary measures are responsible for $246 billion, or 75 per cent.
Mr Hockey’s calculation
A spokesman from Mr Hockey’s office told Fact Check that the interest payments could be assessed based on gross debt for the current year, or by taking the average annual net interest payment over the four years of the forward estimates.
He said that using net debt averaged over four years, the interest cost is close to $1 billion a month, and can be wholly attributed to the former Labor government because when it came to power there was zero net debt.
Net debt is defined in budget papers as “equal to the sum of deposits held, government securities, loans and other borrowing, minus the sum of cash and deposits, advances paid and investments, loans and placements”.
Mr Hockey’s spokesman referred Fact Check to the net debt and net interest payment table in the December 2013 MYEFO, on the basis that the government considers that MYEFO represents the state of the budget at the time the Coalition took power. As set out in the previous fact check on Mr Bowen’s claim about the deficit, Mr Hockey argues that MYEFO contains changes to spending and economic assumptions that should have been made by Labor.
Net debt and interest tables are also in the PEFO released four weeks before the election.
Based on the various budget documents, the figures for estimated net interest payments in 2013-14 have changed as follows:
- Labor federal budget, May 2013: $7.8 billion a year or $654 million a month
- PEFO, August 2013: $8.4 billion a year or $700 million a month
- MYEFO, December 2013: $8.9 billion a year or $740 million a month
- Coalition federal budget, May 2014: $10.5 billion a year or $877 million a month
Using net interest payment forecasts set out in the forward estimates in the most recent budget, Australia’s average interest burden is forecast to be about $953 million a month until June 2017.
Mr Hockey told Parliament that the interest bill “at the moment” is $1 billion a month.
With $329 billion worth of Commonwealth securities currently on issue, the annual gross interest cost is $12.4 billion. So “at the moment”, the monthly interest bill on gross debt is over $1 billion.
Seventy-five per cent of the current gross debt accrued during Labor’s time in government. Deficits that accrue during the term of a particular government are not necessarily attributable only to the actions of that government.
When Labor came to power in 2007 there was zero net debt. If net debt is used as a measure, the average monthly interest payment over the four years of the forward estimates is $953 million, but “at the moment” monthly interest payments on net debt are $877 million.
Using either gross debt or net debt, Mr Hockey’s claim that at the moment Australia is paying a billion dollars every month in interest on the debt that Labor left is exaggerated.
- Hansard, House of Representatives, May 26, 2014
- Australian Office of Financial Management, CGS on Issue
- 2014-2015 Federal Budget, May 2014
- 2006-2007 Federal Budget, Statement 7
- 2013-2014 Federal Budget, May 2013
- Pre-Election Economic and Fiscal Outlook, August 2013
- Mid-Year Economic and Fiscal Outlook, December 2013
- Australian Office of Financial Management, Historical Statistics
- Australian Office of Financial Management, Operational Notices