David Richardson, Senior Research Fellow

The Parliamentary Budgetary Office (2019) has just published a report on net debt but is really a plea for wider use of ‘net financial worth’ as a better indicator than net debt of what it calls ‘fiscal sustainability’.

They say ‘net debt is widely regarded as a key budget indicator by which fiscal sustainability can be assessed’ (emphasis added). However, they say that ‘net financial worth’, which is also published in the budget, is a broader measure of fiscal sustainability that includes all financial assets and liabilities’. The PBO uses very guarded language, but its main message is that rather than net debt, we should be judging fiscal sustainability on the basis of net financial worth.

Financial net worth just so happens to be negative and bigger than net debt so the implication is that we are less sustainable than first thought?

Fiscal sustainability is not defined. That is rather curious in the present climate. Many of the commentators on the US budgetary position have come to the conclusion that budget deficits and debt are benign.

Former US Vice President Dick Cheney once said: 
“Reagan proved that deficits don’t matter” (Leung 2004).

A recent article in the Wall Street Journal reported: 
“U.S. deficits may not matter so much after all — and it might not hurt to expand them for the right reasons” (Harrison and Davidson 2019).

The former IMF Chief Economist in his presidential address to the American Economic Association said:
“Put bluntly, public debt may have no fiscal cost”(Blanchard 2019).

Blanchard also pointed that: 
“When the pace of economic growth exceeds the rate of interest on a country’s debt, managing indebtedness becomes substantially easier. In such cases debt incurred in the past shrinks steadily as a share of GDP without any new taxes needing to be levied.”

Forbes has commented that: 
“No one seems to be knocking on America’s door asking to be repaid. … no one seems to be squeezing the U.S. at all. Unlike Spain, which gets an earful from Germany if it even whispers about increasing its national borrowing, the U.S. hears nothing from anybody (except its own politicians and pundits) when it votes to raise the beanstalk one cap higher [lift the artificial debt limit]. How can that be? It’s almost as if — weirdly — there isn’t anyone out there expecting to get paid back.”

Of course, US bondholders do expect to be paid back, it’s just that they are not concerned about the size of the debt.

None of this discussion is included in the PBO report — just a reference to the one unqualified concept of ‘sustainability’. If you were going to write the definitive piece on sustainability then you would think some discussion of what it is and how it applies might be relevant, let alone a discussion of the controversy over whether it matters.

Neither is there anything there to reflect the fact that private sector concepts are often meaningless in the public sector. The PBO insists net financial worth is a better measure of sustainability but we might ask does a negative net financial worth really affect sustainability and, by that, do we mean that the existence of the public sector is somehow threatened by outstanding debt or net financial worth (as the PBO prefers). A private company is of course completely different. If net worth is negative it is required to cease trading and wind up immediately.

On specifics, years ago The Australia Institute complained that notional amounts such as unfunded super liabilities should not be included in this sort of figuring (Richardson 2011) yet the PBO approves. If they are, why not include the value of such things as potential future tax revenue on the other side of the balance sheet? And indeed, why not include the unfunded value of the age pension into the distant future, vets entitlements, Newstart etc — all these are legislated entitlements that the government of the day has no control over. The first National Commission of Audit (1996) gave the answer, unfunded super seemed reasonable to include because it was not too big, but unfunded future pensions might seem a bit silly and stretching the argument too far.

It would be very useful to have a full debate in Australia on the role of debt and deficits but the PBO discussion is a far cry from a contribution to that._

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References:

Blanchard O (2019) ‘Public Debt and Low Interest Rates’, Presidential Address to the American Economic Association.

Coppola F (2018) ‘Governments Are Nothing Like Households’, Forbes, 30 April.

The Economist (2019) ‘Economists reconsider how much governments can borrow’, The Economist, 17 January.

Harrison D and Davidson K (2019) “Worry About Debt? Not So Fast, Some Economists Say”, Wall Street Journal, 17 February.

Leung R (2004) ‘Bush sought ‘way’ to invade Iraq? CBS 60 Minutes, 9 January

National Commission of Audit (1996) Report to the Commonwealth Government, June.

Parliamentary Budget Office (2019) Net debt and investment funds: Trends and Balance Sheet Implications, Report No 1/2019.

Richardson D (2011) ‘Accounting for a super mystery’, The Public Sector Informant (Canberra Times), 7 July.