Tuesday, August 13, 2013

Australia's debt ceiling

Sinclair Davidson muses in a post about the PEFO on the forthcoming debate about the Australian debt ceiling.
For a start, public debt will breach the debt limit of $300 billion in December of this year. While the opposition will use this event to further criticise the ALP, the fact remains that post-election the government will have to raise the debt limit. More importantly the government (of either side) will have to, at some point, provide a narrative about the appropriate level of public debt that Australia should maintain. While the net debt should be low – even negative – it isn't clear what an appropriate level of gross debt should be.
To my mind there is an obvious answer to this question, at least on the high side. The ratio of debt to GDP should not rise much above 30%, and the evidence for this threshold can be found in the highly contested Reinhart and Rogoff study Growth in a Time of Debt, about which much has been said this year. While most of the conjecture was around the 90% "cliff", the data (once distortions were removed) did point to a significant drop off in average GDP growth of 4.2% for 0-30% and 3.1% for 30-60%.

Now, of course R&R could have chosen intervals of 25 or 33 instead of 30 and produced much the same result, so we should be careful about making the same mistake of marking the exact location of a dangerous precipice on our maps when it's more of a gently downsloping sand dune. Nevertheless, assuming we don't get anywhere near the destructive nature of the debt ceiling debate in America, hopefully a bipartisan tacit agreement can be reached in broad terms to try not to push the ceiling far beyond those levels.

The above does not, of course, rule out blowing the debt past that limit if Europe finally implodes and we get the double dip depression that some commentators have been soothsaying in sombre tones.

Note: along with some of the more traditional labels for posts here on Loaded Dogma, I have started one called Dog vs Cat for the posts I make in response to those from Catallaxy Files.

1 comment:

  1. sinclair always kest use dollar amounts when talking about public debt when it is small.

    If nominal GDP growth is way below trend then the budget will not get back to balance until it goes above trend.

    Of course the terms of trade fell about the same time Sinclair made his famous stagflation forecast.
    and he talks about Treasury getting it wrong!