Australia’s rising government debt is more to do with falling tax receipts than high government spending. Why would this be an issue when our GDP has been growing so quickly?

spending per head is actually markedly down

Government debt has been far higher. John Howard will be remembered for bringing it down. But let’s be honest – it’s a falsehood to claim the Gillard government is increasing debt through reckless spending. The bigger issue is tax receipts and our inability to cash in on the mining boom.

When trying to put the knife in the government, the figure everyone likes to look at it is Australia’s government debt to GDP ratio. It was 22.9 percent last year. And you can look at the Howard years to see how the man fastidiously reduced debt from 31.1% of GDP when he came to power in 1996, down to 10 percent when he left in 2007.

Since then our government debt to GDP has risen a full 13 percentage points. Mind you, in America in the same period it shot up from 64 percent to close to 100 percent. Britain went from 43 percent to 90 percent.  So, it looks like it could be a worldwide phenomenon perhaps. Let’s call it the Global Financial Crisis and suggest that such a worldwide downturn couldn’t all be the work of Julia Gillard.

If it is the PM’s fault then, popular opinion will tell you it’s almost certainly down to reckless government spending. But how true is that?When Howard left the government spent about $55 billion a quarter – now, it’s over $65 billion. That’s a 20 percent increase over five years.  But taking account of inflation, it’s really only a 3 percent increase. Meanwhile the population has increased 9 percent, so spending per head is actually markedly down.

Government tax receipts in the year Howard left office were around $272 billion. Last year they were $329 billion. In real terms that’s a 5 percent increase; again well short of the growth in the population.

Meanwhile, our economy is booming. GDP has risen from $750 billion (in 2007) to around $1.37 trillion (in 2012) – that’s an 83 percent increase. Or 59 percent in real terms. Thank you, mining boom.

Surely, if government debt is rising because tax receipts aren’t keeping pace with population growth, you’d try and increase government income. Like, introduce a mining super-profits tax, for example. One that wasn’t watered down to please the populous. 

That’s why we end up with a graph like the one at the head of the page – the ratio of government debt to GDP steadily rising, the government’s tax receipts as a percentage of GDP quickly falling.  The coalition’s approach will, of course, be to reduce the green line still further – but to do that and reduce government debt they will have to cut spending well, well below the levels of the Howard years.