The National Debt is not What You Think

John Daley is the CEO of a major Australian think tank called The Grattan Institute. I read John Daley’s comments about public debt in Michael Bachelard’s piece in the Sydney Morning Herald.

John Daley observes that the federal government’s Coronavirus-related spending is causing public debt to grow. He believes that this creates a challenge because it means that taxpayers will have to pay higher taxes in the future. This is not correct.

What we call the public debt or the national debt is the savings of the non-government sector, held in the form of tradeable bonds called Commonwealth Government Securities (CGS). This is not a problem. It is in fact a good thing for the non-government sector to have savings. The federal government doesn’t have to issue bonds – it could, if it wanted, provide a different savings vehicle (such as term deposits at the central bank). But it isn’t a problem that the savings are in the form of bonds. The federal government services those bonds in the same way that it makes all of its payments: by having the central bank keystroke numbers into Exchange Settlement Accounts (ESAs). The public debt is not a burden on the government or on taxpayers.

Public debt is not a debt in the ordinary sense of the word. It is really misleading to even use the term public debt or national debt to refer to Commonwealth Government Securities. Ordinarily a debt is a burden – it requires the person who owes the debt to earn income to service the debt. That is obviously not the case with Commonwealth Government Securities because the federal government services those obligations in precisely the same way that it makes all of its payments: by keystroking Australian dollars into existence. The government cannot run out of keystrokes. Therefore CGSs are not a burden on the federal government. There will never be a solvency problem for the federal government in terms of financial commitments that are denominated in its own currency.

John Daley implies that increased deficit spending by the federal government today will eventually have to be offset by federal government surpluses in the future. That is not true, and it has never been true in the history of Australia’s federation. The vast majority of the time the federal government runs deficits. This is because in the Australian economy it is normal for both the foreign sector and the domestic private sector to run surpluses. When this happens, the federal government by definition runs a deficit that equals the sum of the other two sectors’ surpluses.

The constraint on the federal government’s spending is the productive capacity of the economy. The federal government should not target any particular fiscal balance. Whether the federal government should be running a deficit or a surplus, and how large, depends on what is happening in the other two sectors. The federal government’s fiscal balance should be allowed to rise or fall to whatever level is needed at the time to provide good quality jobs for all who want to work, ecologically sustainable production, and stable prices, while meeting the savings desires of the foreign and domestic non-government sectors. In Australia that will nearly always involve a federal government deficit.

The only circumstance in which it would make sense to have a federal government surplus is if the foreign sector were running a large deficit (or put another way, if Australia were running a large current account surplus with regard to the foreign sector). In that situation a federal government surplus would probably be necessary to delete some of the non-government sector’s spending power in order to prevent accelerating inflation.

Some people who can talk authoritatively about these topics include Steven Hail, Bill Mitchell, Martin Watts, and James Juniper.

Nicholas Haines works in the disability support sector in Brisbane, Australia. He has a Master’s Degree in Development Practice from the University of Queensland.

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