How Canberra’s finances have worsened – and why it matters

For more than 20 years, it’s been a basis of Leithner & Company’s operations: as a conservative-contrarian value investor, we think for ourselves – and thus always discount and often reject conventional opinion and behaviour. Warren Buffett epitomises this disposition. “Most people,” he told Newsweek in 1985, “get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” In other words, you stack the odds against yourself when you credulously accept mainstream views or eagerly join the crowd.

The crucial problem is that if you rely upon the herd – and particularly “social media” – for information and opinions, you’ll unwittingly absorb its biases and affirm its outlook; as a result, you’ll become woefully misinformed.

This is hardly a novel insight. As an adult, and particularly after he became America’s third president in 1801, Thomas Jefferson’s youthful confidence in a free press foundered on the shoals of reality – and in his later years he increasingly distrusted journalism and despised journalists. Concluding that it’s far better to be ignorant than deluded, he advised one young man never to read the newspapers (see also Why investors should ignore most “news” and Investors beware: “News” impairs your mental and physical wellbeing).

For these reasons and more besides, I greatly discount and mostly disregard the annual commotion surrounding federal and state governments’ budgets. In my view, commentators’ opinions are often tedious and tendentious; and by my experience, mainstream analyses are at best selective and superficial – and at worst naive and simply wrong.

I also do what apparently nobody else does: examine Canberra’s monthly financial statements. At Leithner & Company, we analyse the Commonwealth’s finances in much the same way we assess ASX-listed companies’. This article summarises our results and their implications.

Budgets versus Financial Statements

Financial statements describe the actual past. Budgets, on the other hand, envisage a desired future. Today’s budget is at best a sober projection of, at worst a delusional wish regarding – and often simply a wild guess about – next year’s and subsequent years’ financial statements. Budgets, in short, express possible results of today’s choices. 

Assumptions (such as rates of amortisation and depreciation, etc.) form a significant part of financial statements. Budgets, in contrast, are mostly collections of assumptions. How much company tax and royalty income will the Commonwealth collect each year during the next several years? That depends not just upon its policies, but also the economy’s future rate of growth, the quantities and prices of Australia’s exports, and who knows what else. How many billions will JobSeeker cost? That depends upon the future rate of unemployment, etc.

Even modest changes to a small number of these myriad assumptions can greatly affect a budget’ bottom line; they can and often do, in other words, convert a deficit into a surplus. Then reality intrudes and confirms that the assumptions were unrealistic. Remember what happened to Wayne Swan’s, Joe Hockey’s and Scott Morrison’s confident expectation of “surpluses”?

There’s a strong parallel between company analysts’ “forward earnings” and Commonwealth budgets’ “forward estimates.” Both reflect implausibly favourable assumptions: specifically, they overestimate income, underestimate outgoings and thus overegg the bottom line.

Like analysts’ “forward earnings,” politicians’ “forward estimates” tell us much about fond hopes – but bear little relation to subsequent reality (see also How experts’ earnings forecasts harm investors; Why you’re probably overconfident – and what you can do about it; and Experts can’t predict yet investors must plan: What, then, to do?).

In contrast, financial statements tell us much about the past and present – and from their trends we can make cautious inferences about the future.

The Commonwealth’s Monthly Income Statement

Revenues and Expenditures

Each month since July 2005, the Department of Finance has published the Commonwealth’s income and cash flow statements and balance sheet (state governments, by the way, aren’t nearly as transparent). From its monthly income statements, Figure 1 plots the Commonwealth’s total CPI-adjusted revenues and expenditures on an annualised (i.e., July 2005-July 2006, August 2005-August 2006, ... and March 2022-March 2023) basis. Revenues increased from $352 billion in the year to July 2006 to $641 billion in the year to March 2023; that’s a compound annual growth rate (CAGR) of 3.7%. Spending rose from $320 billion to $619 billion (CAGR of 4.1%). Both CAGRs exceed GDP’s average rate of increase during these years: the federal government bulks ever larger.

Figure 1: Commonwealth Revenue and Expenditure, Billions of CPI-Adjusted $A, Annualised Monthly Observations, July 2006-March 2023

This disparity of CAGRs encapsulates the Commonwealth’s dilemma. Some people will contend that it’s spending too much; others will retort that it’s taxing too little. Yet overtly raising revenues, which are mostly taxes, isn’t easy; hence the resort to covert means such as “bracket creep.” Abating expenditures’ rate of growth is even harder, and cutting spending in absolute terms is usually insuperably difficult.

If Canberra raises taxes, it incurs the displeasure of taxpayers; but if it decelerates the growth of expenditures, it triggers the wrath of tax-consumers. Tax-consumers outnumber tax-producers, and in a democracy the majority rules. The “solution” since the GFC, as we’ll see, has debt-financed deficit spending – and thus, increasingly, macro-economic stagnation.

It’s true that in the year to March 2023 expenses have fallen considerably (to $619 billion) from the all-time high they attained in the 12 months to February 2021 ($797 billion). However, this latter amount remains considerably greater – that is, well above the long-term trend – than the $562 billion in the year to January 2020.

During the GFC and COVID-19 panic, revenues sagged but expenditures rose. Moreover, after the GFC revenues took years to rescale their pre-GFC high whilst spending mounted relentlessly.

Figure 2 expresses revenues and expenditures as annualised (rolling 12-month) percentage changes. Since 2007, expenditures have grown more quickly (average of 4.7% per 12-month period) than revenues (3.8%).

Figure 2: the Commonwealth’s Revenue and Expenditure, Annualised Percentage Changes, July 2007-March 2023

Expenditures’ growth has been virtually continuous – only in COVID-19’s aftermath has it fallen – but revenues have been more elastic: they ebb as well as flow, largely as a consequence of the business cycle.

Components of Revenue

Taxes provide virtually all (average of more than 90%) of the Commonwealth’s revenues. Since 2007 the Department of Finance has reported its major components in a comparable manner; Figure 3 plots them. “Company/PRRT” includes receipts from company taxes, the petroleum resource rent tax (PRRT) and superannuation taxes. “Other/Indirect” revenue comprises customs and excise duties, interest and dividends and proceeds from fees and sales of goods and services.

Figure 3: Commonwealth Tax Revenues, Major Categories, Billions of CPI-Adjusted $A, Rolling 12-Month Periods, July 2008-March 2023

Revenues from personal income tax fell slightly during the GFC and stagnated during the COVID-19 crisis; otherwise, they’ve risen virtually without interruption. Company tax, PRRT, etc., on the other hand, took more than ten years – until the 12 months to June 2021 – to regain the level (CPI-adjusted $130 billion) they scaled shortly before the GFC. Moreover, for most of this time the Commonwealth collected less from company and related taxes than from indirect taxes and other revenues. From 2020 to 2022, on the other hand, the receipt of company taxes boomed.

Figure 4 expresses the quantities in Figure 3 as percentages of the Commonwealth’s total revenues from taxation. Personal income tax’s share of total tax rose steadily from 43% in 2008 to 51% in 2006. It then remained stable until 2020, sagged somewhat during the COVID-19 crisis and rebounded strongly (to 50% in the year to March 2022). The company/PRRT share, on the other hand, dropped steadily from 30% in 2008 to 20% in 2016, and since then has fluctuated between 20% and 30%. As a result, its current share (26%) is lower than in 2008. The other/indirect share has varied between 25% and 30%.

Figure 4: Commonwealth Tax Revenues, Major Categories as Percentages of Total, Rolling 12-Month Periods, July 2008-March 2023

Components of Expenditure

Figure 5 plots the Commonwealth’s major categories of expenditure. Operating expenses comprise wages and salaries (including superannuation) of bureaucrats and military personnel; goods and services (such as the consultants, office space, etc.); and depreciation and amortisation. Current transfers encompass non-capital grants (to businesses, charitable organisations, state governments, universities, etc.), subsidies (of aged care, private sector wages, etc.) and “personal benefits” such as aged, disability and military pensions, JobKeeper and JobSeeker payments, etc. Capital transfers include capital and infrastructure funding to businesses, private schools, state governments, universities, etc.

Figure 5: Commonwealth Expenditures, Major Categories, Billions of CPI-Adjusted $A, Rolling 12-Month Periods, July 2008-March 2023

Current transfers are by far the biggest component of expenditure – and the only one which COVID-19 affected. Interest on the debt is and capital transfers are relatively minor categories. Operating expenditure is the second-largest component, and has risen glacially but steadily over the years.

Figure 6 expresses these major components of total expenditure as percentages of total expenditure. Shortly after the GFC, current transfers’ share fell somewhat. It remained largely stable until the COVID-19 crisis and has fallen markedly since 2021. During the year to March 2023, its share (57%) was the lowest on record. Operating expenditures’ share, on the other hand, has risen slowly but steadily, from 28% in 2008 to 36% – an all-time high – in the 12 months to March 2023. Finally, interest and capital transfers have comprised a constant but minor (approximately 5% each) share of total expenditure.

Figure 6: Commonwealth Expenditure, Major Categories as Percentages of Total, Rolling 12-Month Periods, July 2008-March 2023

The Commonwealth is bloated and self-serving. Should it really be devoting more than one-third of its income to itself – on bureaucrats’ salaries, superannuation and other operating costs – and just two-thirds to everybody else?

Net Income

Unlike private businesses, the Commonwealth’s primary purpose isn’t the generation of profit. Like any business, however, it can’t indefinitely sustain losses. And like ASX-listed entities, its income statement contains several “bottom line” measures.

Net operating balance (NOB) equals total revenue minus total expenses including accrued capital expenditure. As an accrual measure, it records revenues and expenses when they’re incurred rather than received or paid; in general, it indicates whether the government must sell assets or borrow in order to finance its operating activities. If NOB is positive (negative), the government’s revenue is (isn’t) sufficient to finance its operations including the net investments in non-financial assets it must undertake. NOB thus measures the sustainability (relative to the tax base) of the existing level of goods and services that the government supplies.

A second measure of net income, fiscal balance (FB), equals NOB net of capital investment. It’s always greater than the NOB unless net capital investment is negative (i.e., the government sells rather than acquires assets). Also an accrual measure, if FB is less than $0 then the government must borrow in order to cover its day-to-day operations (not including the net investments in non-financial assets it requires in order to provide goods and services). A third measure of net income is simply the difference between the annualised revenues and expenditures plotted in Figure 1.

Figure 7: Three Estimates of the Commonwealth’s Net Income, Billions of CPI-Adjusted $A, Annualised Monthly Observations, July 2006-March 2023

Figure 7 plots these three measures. During all rolling 12-month periods, NOB has averaged -$3.3 billion, FB $8.7 billion and net income -$24.4 billion; from July 2006 to April 2020, which excludes the enormous swings attributable to the COVID-19 panic and lockdowns, etc., NOB averaged -$0.3 billion, FB $6.1 billion and net income -$10.8 billion. Except during the GFC, from July 2006 to April 2020 these 12-month periods varied within the range ±$50 billion. During the periods since October 2022, NOB has exceeded $20 billion, FB $40 billion and net income $15 billion.

Canberra’s income statements since 2005 demonstrate that its current income has (a) generally been able to finance its current non-capital spending, but (b) usually fallen short of the amount required to finance both its current operations and the capital expenditure required to maintain these operations into the future.

The Commonwealth’s Monthly Cash Flow Statement

Operating Cash Flows

In Creating Shareholder Value: A Guide for Managers and Investors (The Free Press, 1997), Alfred Rappaport stated: “Cash is a fact, profit is an opinion.” He contended that profit relies upon accounting conventions and assumptions that are prone to adjustment – and, potentially, exploitation. Cash, in contrast, is harder to manipulate. Consequently, major discrepancies between reported profit and cash flow can occur.

Rappaport has a point, but we mustn’t overstate it. In The End of Accounting: The Path Forward for Investors and Managers (Wiley Finance, 2016), Baruch Lev countered: “although the ending balance in cash and the change in cash from one period to the next are not readily subject to manipulation, the components of total cash flow, the operating, investing, and financing amounts, are more susceptible to (manipulation) …”

The general point, however, is indisputable: in the long run it’s essential that a company earns a profit (and that a government’s NOB remains above $0). But having enough cash to operate day-to-day – that is, a positive operating cash flow – is the more pressing concern.

Using monthly income statements produced by the Department of Finance, Figure 8 plots the federal government’s operating cash received, operating cash used and net operating cash flow (OCF) for each 12-month period since July 2006. Operating cash received mostly comprises taxes and secondarily proceeds from the sale of goods and services. Operating cash used is mostly “personal benefits” (e.g., pensions, JobSeeker allowances, Medicare rebates, etc.) and payments to employees, and incidentally payments to suppliers of goods and services and recipients of grants and subsidies.

Figure 8: The Commonwealth’s Operating Cash Flow, Billions of CPI-Adjusted $A, Annualised Monthly Observations, July 2006-March 2023

The key point is two-fold: first, inflows of operating cash usually rise but occasionally sag (as they did during and after the GFC, and during the COVID-19 panic); second, with one major exception outflows of operating cash never decrease.

From July 2006 until the year to September 2009, operating cash received net of operating cash used, i.e., OCF, was positive; from then until 2018, it was negative (and exceeded -$50 billion in 2011 and 2015); in 2018-2020, it was positive (and as high as $24 billion in the 12 months to May 2019). OCF plunged as a result of the COVID-19 crisis and panic, to as low as -$222 billion in the 12 months to February 2021, and remained negative until February 2022. Since then it’s become positive: in the 12 months to March 2023, it was $16 billion.

Figure 9: the Commonwealth’s Operating Cash Received and Used, Annualised Percentage Changes, July 2007-March 2023

Figure 9 expresses operating cash received and used as annualised (rolling 12-month) percentage changes. On average since 2007, inflows of operating cash have increased 3.5% per 12-month period and outflows 5.6%; from 2007 until January 2020, that is, excluding the ructions attributable to COVID-19, inflows increased 3.7% per 12-month period and outflows 4.5%.

The annualised percentage changes of cash inflows vary roughly in accordance with the business cycle; that is, during economic downturns their rate of growth decelerates and sometimes falls below 0%. Conversely, outflows of cash are largely invariant to but occasionally vary inversely with the business cycle; that is, they seldom fall but during economic downturns such as the GFC and COVID-19 their rate of growth accelerates.

Investment and Finance Cash Flows

Figure 10 plots the Commonwealth’s cash flows from investments and financing activities. Investment cash flow sums the purchase and sale of property, plant and equipment, and the issuance and repayment of loans (including HECS). A negative number indicates an outflow of investment, and a positive one (inflow) indicates disinvestment. Finance cash flow comprises borrowing and repayment of debt: a positive number (inflow) indicates that on balance it’s borrowed and a negative one that it’s repaid debt.

Figure 10: the Commonwealth’s Investment and Finance Cash Flow, Billions of CPI-Adjusted $A, July 2006-March 2023

Since 2006, cash flows from investments have almost always been negative – that is, the Commonwealth has almost always invested – and the outflow has mostly varied within the range $25 billion to $75 billion. During the 12 months to September 2020, these outflows peaked at $139 billion. During the next year, outflows become inflows – that is, “disinvestment” occurred – of as much as $89 billion in the year to September 2021. Since July 2022, annualised outflows of ca. $30 billion have resumed.

On an annualised basis, at no time since 2006 has the Commonwealth repaid debt: it’s always borrowed. Consequently, its cash flows from finance are uniformly positive.

Before the GFC, it borrowed relatively sparingly – $8 billion or less on an annualised basis. From early-2009 until early-2019, in contrast, its annualised borrowings varied between $50 billion and $100 billion. They then fell sharply, to as low as $8 billion in the 12 months to April 2019, before skyrocketing as high as $326 billion in the year to October 2020. Since then they’ve again fallen drastically, to as low as $2 billion in November 2022, before rebounding to $16 billion to March 2023.

The Commonwealth’s Monthly Balance Sheet

“Astute observers of corporate balance sheets are often the first to see business deterioration or vulnerability as inventories and receivables build, debt grows, and cash evaporates,” noted Seth Klarman in his Preface to the sixth edition of Benjamin Graham ‘s and David Dodd’s classic book Security Analysis.

The detection of the Commonwealth’s weakening finances doesn’t require astute observation. It merely requires what the vast majority of “analysts” apparently can’t be bothered to undertake: a basic examination of its balance sheet. Such an overview quantifies the results of trends in its income and cash flow statements since 2005.

Liabilities

Figure 11 plots two measures of the Commonwealth’s debt. Net debt is the sum of interest bearing liabilities (measured at their market value) less the sum of selected financial assets (cash and deposits, advances paid, and investments, loans and placements). “Total interest-bearing liabilities” measures the market value of the Commonwealth’s short-term (bills) and long-term (bonds) borrowings.

Adjusted for CPI, the market value of Canberra’s interest-bearing liabilities skyrocketed from $99 billion in July 2008 to $931 billion in March 2023. That’s a CAGR of more than 16% per year – and approximately five times GDP’s rate of growth over this interval (see also Is Australia Risking a Debt Crisis?).

Figure 11: Two Measures of the Commonwealth’s Debt, Billions of CPI-Adjusted $A, Monthly Observations, July 2008-March 2023

Moreover, on the eve of the GFC Canberra’s net debt was less than zero – that is, cash and other assets exceeded debt – and the CPI-adjusted market value of its interest-bearing liabilities was less than $100 billion. From 2008 until the eve of the COVID-19 pandemic, in contrast, both measures rose relentlessly; and during the panic, gross debt accelerated to more than $1 trillion.

At first glance, the measures of debt since 2020 in Figure 11 appear to contradict the data in Figure 10. There’s no inconsistency: Figure 10 plots flows – that is, annualised increments to debt – whereas Figure 11 plots total levels of the debt’s market value. Since 2020, largely as a response to rises of interest rates, gross debt’s market value has fallen (to $931 billion, and net debt’s to $566 billion in March 2023).

Figure 12 plots two measures of the federal government’s leverage. Both its net debt and total interest-bearing liabilities as percentages of total revenues climbed greatly and almost without interruption between 2007 and 2015; for the next few years they then stabilised, zoomed during the COVID-19 panic and then – as the market value of debt has fallen and revenues risen – have declined from their all-time highs.

Figure 12: Two Measures of the Commonwealth’s Leverage, Monthly Observations, July 2008-March 2023

The current value of the Commonwealth’s total interest-bearing debt is approximately 1.5 times (150%) its total annualised revenues. If it wishes to cut this ratio significantly, then it must either slash spending or greatly increase taxation. Neither of these possibilities seems likely; hence Canberra’s debt won’t fall. Quite the contrary: it’ll continue its inexorable rise.

Equity

How has continual borrowing impacted the Commonwealth’s balance sheet? Figure 13 plots its net assets (equity) since July 2008. In that month, assets exceeded liabilities by $113 billion. Since then it’s been almost continuously – and cumulatively drastically – downhill: by January 2021, liabilities exceeded assets by $881 billion; that’s a deterioration of almost $1 trillion! Since then, as the debt’s market value has shrunk, so has the disparity (to $608 billion in March 2023).

Like the Reserve Bank's, the federal government’s liabilities greatly exceed its assets (for details, see Does the RBA’s “negative equity” matter?). But unlike the RBA’s, Canberra’s equity has been continuously negative since the GFC.

Figure 13: the Commonwealth’s Net Assets (Equity), Billions of CPI-Adjusted $A, Monthly Observations July 2008-March 2023

Conclusions

The mainstream pays fleeting attention to the federal government’s finances: for 1-2 weeks every year, it obsesses about them – and virtually ignores them the other 50 weeks. It lauds the allegedly good intentions of today’s inputs (expenditures), but downplays the poor outcomes of yesterday’s spending. Its assessment is thus woefully biased: it fixates upon fantasies (Canberra’s budget), neglects realities (its current financial statements) and almost completely ignores these realities’ long-term trends.

The media’s biases suit politicians: generally, they allow them to compete on the basis of illusion and delusion rather than truth; specifically, the media’s prejudices allow politicians to manipulate budgets’ assumptions – and thereby concoct fantasies that suit their partisan ends.

Politicians know that these days few people care much about subsequent shortfalls of reality vis-à-vis today’s expectations – next year’s assumptions will enthrall them anew – and that virtually nobody bothers to examine current fiscal realty.

How have Canberra’s finances deteriorated over the years? Leithner & Company’s analysis of the federal government’s monthly financial statements since 2005 has uncovered six sobering aspects of this reality:

1. Canberra’s expenditures and cash used typically increase more rapidly than its revenues and cash received. Further, outgoings usually rise whilst inflows – particularly company tax – vary according to the business cycle.
2. Revenues have generally covered current non-capital spending, but have been chronically unable to finance both current expenditures and the investment required to undertake future operations. Hence the habitual resort – which has become an addiction – to deficits and borrowing.
3. The federal government is grossly bloated. Should it be devoting more than one-third of its income to itself – as operating costs, mostly bureaucrats’ salaries – and just two-thirds to everybody else?
4. Never since 2006 has Canberra repaid debt: instead, it’s always borrowed.
5. Consequently, the market value of its interest-bearing liabilities soared from less than $100 billion before the GFC to more than $1 trillion at the height of the COVID-19 panic.
6. Like the Reserve Bank’s, the Commonwealth’s liabilities greatly exceed its assets. Unlike the RBA’s, the federal government’s negative equity has existed – and grown – almost continuously since the GFC.

What It Means and Why It Matters

It’s no accident that in 2006 the Commonwealth’s net debt was well below $0 and its net assets well above $0. Still less is it coincidence that since then it’s borrowed continuously; accordingly, least of all is it mischance that over this interval its finances have steadily – and cumulatively drastically – deteriorated. From the mid-1980s to 2006, powerful forces restrained Canberra’s impulse to borrow and spend; since then, however, they’ve disappeared.

 Using figures compiled by the Australian Bureau of Statistics, Figure 14 plots one of these forces. Australia’s terms of trade (“TT”) is the ratio of export prices (weighted according to their percentage of total exports) to similarly-weighted import prices. An increase of the ratio indicates that Australia is receiving relatively more income for its exports relative to what it pays for its imports; and the more it rises, the more income it receives. A decrease indicates that the country is receiving relatively less income for its exports relative to what it pays for its imports.

From September 1959 to December 2005, TT was comparatively stable: it fluctuated without trend and averaged 57.5. In sharp contrast, from December 2005 to December 2022 its trend has been strongly upward and it’s averaged 90.0. Currently, it’s close to its all-time record high (118.1 in June 2022).

Figure 14: Australia’s Terms of Trade, Quarterly Observations, September 1959-December 2022

What might happen if and when TT falls? History provides an instructive example. From the September quarter of 1986 to the March quarter of 1987, TT plumbed its all-time lows (average of 46.5 during this interval). Indeed, between March 1974 (when TT reached 74.3) and late-1987, TT sank 37%.

On 14 May 1986, the Australian Bureau of Statistics released figures showing the worst trade deficit (up to that point) in Australia’s history. “We must let Australians know truthfully, honestly, earnestly,” said the Treasurer, Paul Keating, in response that day, “just what sort of international hole Australia is in. It’s the prices of our commodities (in global markets) — they are as bad in real terms (as they’ve been at any time) since the Depression ... If this government cannot get the adjustment, ... keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for. We will just end up being a third-rate economy, a banana republic.”

“The simple and unavoidable economic fact,” the Prime Minister, Bob Hawke, added on 12 June 1986, “is that the world, by its reduction in the prices they pay us for what we ... sell ..., has marked down our national income ... We are (therefore) less able to sustain the (living) standards of the past ... That’s what’s happened to our national economic capacity as a result of that fall in our export prices ... That’s where our problem has occurred; now we have to make the internal adjustments to meet that challenge.”

In short, a marked decrease of TT, if and when it occurs, will not merely necessitate the abandonment of profligacy: it will also require years – and perhaps decades – of fiscal discipline. Many of the “internal adjustments” (such as floating the Australian dollar, deregulating the financial system and privatising the Commonwealth Bank and Qantas under the ALP, and reforming industrial relations and selling Telstra under the Liberal-National Coalition) of the 1980s and 1990s are well-known. Others remain comparatively unrecognised – perhaps none more so than the considerable strengthening of Canberra’s financial position during the decade to 2006.

“The federal government will finally manage to do what most Australians struggle to achieve – pay off the credit card,” reported The Sydney Morning Herald (“Government to Pay off National Debt,” 20 April 2006). “Treasurer Peter Costello has declared 21 April ‘debt-free day’ to mark the government’s final payment on (its credit) card.”

“As best as we can tell,” he added, “tomorrow the Commonwealth will eliminate its net debt. In fact, from tomorrow it will become a net saver, to save for some of the big challenges of the future.”

When the Coalition came to office in 1996, Canberra’s gross debt was $96 billion. Thanks to more than $46 billion of asset sales, including half of Telstra plus consecutive large FBs and NOBs, by 2006 the Howard government was able to repay this debt. Costello said that the Commonwealth’s debt-free status would “help put the (federal) government in a better position to handle the costs associated with an ageing population.”

Today’s situation is diametrically different. Since 2006, Australia’s terms of trade have soared. Moreover, and thanks to China’s insatiable appetite for Australia’s resources, this country now exports significantly more than it imports. Consequently, the pressure to undertake difficult “adjustments,” as Hawke and Keating dubbed them, has effectively disappeared. And until recently central banks suppressed rates of interest to unprecedented lows.

In short, Canberra’s urge to spend and its temptation to borrow – underpinned by voters’ “entitlements” to other peoples’ money – have become irresistible. The easy path to penury – profligacy financed by debt and deficits – has displaced the hard but prudent and productive road to prosperity.

Never mind the current NOB and FB: a once debt-free Commonwealth is now addicted to debt-financed deficit spending. The implications are sobering: before the GFC, it abandoned reform; since then, its finances have deteriorated drastically; consequently, it’s now in a much worse position to handle the costs of an ageing population – or to save for some of the big challenges of the future, such as a military emergency, another financial crisis or pandemic.

The inescapable reality is that deficits and debt today mean higher consumer price inflation, as well as higher taxes and rates of interest, tomorrow. In short, “stimulus” begets stagnation. And that, in turn, erodes living standards – and investors’ returns (see also Farewell low “inflation” and interest rates?, Why inflation is and will remain high and Three risks you can discount – and one you can’t).

“It is notable,” says Michael Pettis (“How Does Excessive Debt Hurt an Economy?” Carnegie Endowment for International Peace, 8 February 2022), “that in almost every case in history when a country’s rapid growth has been associated with even more rapid growth in its debt burden, the subsequent adjustment has always turned out to far more difficult than even pessimists had predicted ... There is little reason to believe that the future will be much different.”

Hence the vital questions for Australian investors – and Australians as a whole: when will the Commonwealth stop cosseting “insiders” and harming “outsiders”? As it did under Howard and Costello, will it voluntarily embrace restorative fiscal discipline? Or – as occurred in Gough Whitlam’s time as PM in the 1970s and during Bob Hawke governments of the 1980s – will external circumstances force a reckoning with reality?

And if the reckoning commences under the current government’s watch, which of its predecessors will it reprise? Will Anthony Albanese imitate Bob Hawke’s and Paul Keating’s actions from the mid-1980s to the early-1990s? Or, like Kevin Rudd during the GFC and Scott Morrison during the pandemic panic, will Albanese emulate Gough Whitlam?

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