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Australian Federal Budget 2018 - Reduce government debt or provide tax cuts? - April 2018

Proposition 1: "Slowing the growth in the debt to GDP ratio should be a priority for Australian governments."

Proposition 2: "Slowing the growth in the debt to GDP ratio is a higher priority than income or corporate tax cuts."

Collaborator credits: we would like to thank James Giesecke for suggesting the idea for this question and Danielle Wood for her assistance in framing these poll questions and her expert overview of the results.

Overview of poll results by Danielle Wood, Grattan Institute

Danielle Wood

Danielle Wood, Grattan Institute

When the Treasurer delivers the federal budget on Tuesday night, the eyes of the nation will be on the government’s finances.

Will the government have a credible path back to surplus after nine years of deficits? Will we see a turnaround in the growth in net government debt currently forecast to reach as high as 19.2 per cent of GDP in 2018-19?

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Proposition 1

NEP Q28 Proposition 1 Chart 1 Responses

NEP Q28 Proposition 1 Chart 2 Responses weighted

Proposition 2

NEP Q28 Proposition 2 Chart 1 Responses

NEP Q28 Proposition 2 Chart 2 Responses weighted


Responses (29)


 

Peter Abelson

1 - Disagree

2 - Disagree

1 - The statement talks about growth in debt rather than the current level which complicates response. Overall, current net debt is manageable. Unfortunately, budgets often mix capital with recurrent expenditure. Borrowing for productive capital investment capital is reasonable. Extending the debt significantly for recurrent services is not justified under current economic conditions.

2 - Again the question is overly complicated. This respondent disagrees on the basis that modest income tax cuts would be slightly preferred policy.


 

Rachel Armstrong

1 - Agree

2 - Uncertain (neither agree nor disagree)

1 -

2 - It really depends on whether or not the government is on track to securing a long-term reduction in debt to GDP ratio. If it is, then prioritising personal and company tax cuts would not be an issue. If the high debt-to-GDP ratio is more entrenched than a short-term phenomenon, then debt reduction should take priority.


 

Harry Bloch

1 - Strongly disagree

2 - Strongly disagree

1 - Australia has among the lowest ratios of national government debt to GDP of all developed countries, which is unusual given the relatively high rate of population growth here. High population growth requires extra infrastructure. Just as a young and growing family generally relies on mortgage debt to provide housing, rapidly growing countries generally incur government debt to provide infrastructure. Growing populations provide growing output and government revenue, which can be used to pay off debt. Having the current population pay for the infrastructure needs of the future is like having parents buy houses for their offspring, not unheard of but not normal.

2 - The most immediate need for government revenues is to provide funding for expensive new programs, including the NDIS and the Gonski reforms to education funding, without stripping funding from other important programs, such as Medicare. Eventually, bracket creep will raise Commonwealth revenues as a share of GDP to a level sufficient to provide proper funding of all these programs and there will be an opportunity for cuts to personal income tax to compensate for bracket creep.


 

Matthew Butlin

1 - Strongly agree

2 - Agree


 

Lisa Cameron

1 - Agree

2 - Agree

1 - Although the public debt to GDP ratio has grown over the past 10 years, it is not especially high by international standards. Nevertheless, Australian governments should endeavour to keep the growth in public debt in check.

2 - Reducing public debt is more desirable than reducing taxes because tax cuts tend to get locked in as it is politically difficult for future governments to increase tax rates. Thus tax cuts are likely to result in greater government debt in the future and/or undesirable public spending cuts. Australian society would be best off if governments focussed on building the tax revenue base so as to allow future public expenditures that are necessary to ensuring a cohesive society without necessitating increases in government debt.


 

Fabrizio Carmignani

1 - Uncertain (neither agree nor disagree)

2 - Agree

1 - While of course nobody would claim that we should let the debt to GDP ratio grow, theory and empirical evidence suggest that out current level of debt to GDP ratio is (i) sustainable and (ii) well below the threshold past which debt could slow down economic growth. In this regard, slowing the growth of the ratio is not a top "priority" for the government.

2 - If the choice is between slowing the growth of the debt to GDP ratio and cutting taxes, then the debt to GDP ratio comes first. This is because cutting taxes is not a priority, particularly company taxes. However, I should remark that both the debt to GDP ratio and cutting taxes are significantly less of a priority than increasing spending on public goods and infrastructure. According to poll reported in The Australian on 24 April, voters seem to be very clear about this order of priorities.


 

Bruce Chapman

1 - Agree

2 - Agree

1 - At some point very high debt means less capacity for budget flexibility because of interest rate payment obligations. But we are nowhere near this so the priority is not great.

2 - My answer is influenced significantly by my view that the case for either income or corporate tax cuts is very slight.


 

Ken Clements

1 - Disagree

2 - Strongly disagree


 

Kevin Davis

1 - Agree

2 - Agree

1 - Not always a priority it depends on optimal value and current circumstances.

2 -


 

Brian Dollery

1 - Strongly agree

2 - Agree


 

Uwe Dulleck

1 - Disagree

2 - Uncertain (neither agree nor disagree)

1 - The debt to GDP ratio itself is a poor measure off smart fiscal policy, it does depend a lot on the type of investments the government makes with the borrowed funds. Interest rates are low and good investments can increase future growth. These opportunities need to be carefully considered. There cannot be a simple choice regarding a priority.

2 - As above, we should think a bit further tax cuts (whether company or income) than just these two options.


 

Saul Eslake

1 - Strongly agree

2 - Uncertain (neither agree nor disagree)

1 - My answer is of course context-specific, rather than a general rule to be followed at all times and in all places. And it says nothing about how quickly or aggressively the debt-to-GDP ratio should be slowed (since that is also context-specific). It's also relevant that the Federal Government doesn't undertake much by way of infrastructure spending (so the usual arguments about it being appropriate for infrastructure spending to be partly funded by debt are less applicable here). But, in present circumstances and given the forecasts/projections the Government is using, returning the Budget to surplus and slowing the growth in debt as a pc of GDP should be a priority.

2 - Had some difficulty answering this question in a binary way because I would prioritise slowing the growth in debt to GDP ratio above cutting the corporate tax rate; but I am more ambivalent about the relative importance of (well targeted) personal income tax cuts vs putting a cap on debt growth.


 

Gigi Foster

1 - Uncertain (neither agree nor disagree)

2 - Agree

1 - The debt-to-GDP ratio is an odd bird in the first place, as by combining a stock measure corresponding to the government's position and a flow measure corresponding to the entire nation's position, it is not interpretable using conventional economic logic. It does not capture the government's ability to re-pay its debt since it does not accommodate tax rates and regulations, and it does not capture the nation's ability to keep growing as it does not capture the suite of things funded by the debt (which could be any number of things, running the gamut from education to defence). The ratio is arguably a noisy signal about the economic health of a nation but it is a symptom, not a cause, and the cause can be of very different economic import for different nations. Whether slowing up the recent growth we've seen in the Australian debt-to-GDP ratio is something that should be "a priority" is hard to answer mainly because it depends crucially on how it's done.

2 - Australian tax rates are of the same order of magnitude as those of its peers. Despite the media frenzy about Trump's latest tax cuts having ripple effects for other countries as they lose their international competitiveness, I don't see that as a major concern for Australia. I just do not think the sensitivities of the decisions of individuals or corporations to tax rates in isolation are strong enough. Hence the reason to respond "Agree" to this proposition is that I disagree that tax cuts should be on the table at all at this time.


 

john freebairn

1 - Strongly agree

2 - Uncertain (neither agree nor disagree)

1 - All indicators point to an underlying structural deficit, e.g. IGR; unfunded NDIS, education, defence, foreign aid, etc expenditures; bracket creep is not an acceptable route for higher taxation; inevitable risks of a future recession and need for a strong fiscal position.

2 - The underlying structural budget problem requires fundamental rethinking across all areas of expenditure and taxation. Playing with bits and pieces of the bigger puzzle is unlikely to solve the challenge. Income tax reform is much more than changing tax rates.


 

Paul Frijters

1 - Agree

2 - Strongly agree

1 - The current situation of stable public spending and reduced taxation is not sustainable because eventually the debt has to be limited, so something has to give. The key thing that must happen is to increase the tax base. The sooner the better, though it is probably not a political priority until the debt ratio is far higher (well above 100%).

2 - Tax cuts are the opposite of what should happen. Vigorous pursuit of tax avoidance and re-claiming areas of revenue for the public are essential in the longer-run. The raid by both major parties on the public purse must stop.


 

Lata Gangadharan

1 - Disagree

2 - Disagree

1 - The answer to this would depend on how the economy is performing currently. Recent figures show economic growth to be below the threshold where it would be considered strong and sustainable. Inflationary pressures are also mild right now and unemployment is higher than ideal. This suggests that the performance of the economy is not very strong. The RBA interest rates are also at record lows, which indicates that with inflation being mild, the RBA believes that now is the time to stimulate economic growth. Prioritising paying back debt at this point would only undercut what the RBA is trying to achieve.

2 -


 

Prue Kerr

1 - Agree

2 - Agree

1 -

2 - Investment depends on many imprecise factors, political stability, well-behaved labour, reliable infrastructure all feeding into 'uncertainty'. Tax is a known cost and unreliable impact of changes on investment.


 

Geoffrey Kingston

1 - Disagree

2 - Disagree

1 - The net debt of the nonfinancial sector of the federal government has been a mere 18 or 19 per cent of GDP for the last two quarters of available data. Recent federal tax revenues have been surprisingly buoyant, and look set to remain strong for the foreseeable future. So slowing the debt to GDP ratio is not a priority. That would just create room for another burst of spending on pink batts, etc.

2 - Countries in our peer group, including Ireland, the United Kingdom, Canada & the United States, have all successfully implemented deep cuts in corporate tax rates, notwithstanding much higher ratios of debt to GDP. There's no prize for originality in policy, and this maxim applies to our unusually high rate of company tax.


 

Michael KNOX

1 - Agree

2 - Strongly disagree

1 - Australia is a capital importing economy. We constantly need to raise funds on the international wholesale capital market. We currently still enjoy a AAA rating
which allows us to raise funds at a reduced rate.

A relatively low public debt to GDP ratio is one of a number of indicators which
have to be maintained at a healthy level to allow us to continue to enjoy that reduced rate.

2 - The actual cost of corporate tax cuts is very small relative to GDP. In a debate on Tax policy in Philadelphia in January, Kevin Hassett, the Chair to the Presidents council of Economic Advisors noted that the net costs of US corporate tax cuts was only $US300 billion dollars. This is small compared to a US GDP of almost $US20 Trillion .


 

Tony Makin

1 - Strongly agree

2 - Agree

1 - Many say Australia's public debt to GDP ratio is relatively low by the standards of other advanced economies, and therefore not a concern. But at its highest level in over 50 years as a proportion of GDP, federal public debt is unlike other countries’ as it overwhelmingly reflects excess recurrent and social welfare spending (the States undertake most of the nation’s infrastructure spending), and is predominantly owed abroad. Federal public debt has also been one of the fastest growing in the world post GFC according to the latest IMF Fiscal Monitor.
The national income drain in the form of interest paid to foreign bondholders is currently around $9 billion per annum and rising, some four times the size of Australia’s foreign aid budget. Each percentage point rise in world interest rates would add another $2.5 billion to public debt interest paid abroad, more than the Opposition is likely to raise from ending cash refunds for retirees for dividend imputation credits.
Related discussion.

2 - Slowing the rise in public debt versus tax cuts isn’t necessarily an “either or” question. Both are possible with the never-mentioned option of substantial cuts to federal government spending. In the absence of spending cuts however, any GDP boost from income tax cuts on the supply-side is unlikely to outweigh the national income loss due to higher servicing costs on additional foreign public debt because income tax cuts are likely to be small for the average household. On the other hand, a stronger case exists for further company tax cuts, as these would encourage greater domestic and foreign investment.


 

James Morley

1 - Uncertain (neither agree nor disagree)

2 - Agree


 

Margaret Nowak

1 - Agree

2 - Agree

1 - Using the cyclical upswing to slow or even reverse the growth in the debt to GDP ratio will strengthen the ability of government to respond to the next fiscal downturn.

2 -


 

John Piggott

1 - Agree

2 - Disagree

1 - Our debt to GDP ratio is to large by international standards. But Australia is a (perhaps not so) small open economy, and we will become vulnerable if we let this ration get too high.

2 - I think we need sensible tax reform. I dont think it's impossible, with strong leadership. This could easily comprire an increase in top marginal rates of income tax, a decrease in corporate tax rates, and some adjustment in the GST rate. The current proposed phased reduction in corporate tax rates, plus a 2 percentage point increase in GST and a two percentgae point incerase in the top marginal rate, might actually reduce the debt ratio, by managing revenue and stimluating investment and growth simultaneously.


 

John Quiggin

1 - Agree

2 - Strongly agree

1 - More precisely, the priority should be to stabilise net worth. With low long-term interest rates, debt-financed public investment is good. A surplus on an accrual basis would be desirable, though this is not a top priority.

2 - We need an increase in the revenue/GDP ratio. Cutting taxes is a step in the wrong direction.


 

Rana Roy

1 - Disagree

2 - Disagree

1 - Long-term forecasts are not without risk of error but my strong expectation is that every well-functioning economy will carry a stock of public debt into the Day of Judgement, yielding a flow to interest to bond-holders up until the day preceding the Day of Judgement. The point is that public debt is the counterpart of an enduring asset class: it does not need to be “repaid”. What needs to be paid is the interest, preferably with a regularity and certainty that ensures that it is not burdened with a risk premium. According to The Economist, public debt in the advanced economies “has been about 105% of GDP on average since 2012”. And according to RBA stats, the differential between Australian and US 10-Year Government Bond Yields as at end March 2018 is zero. On this evidence, the growth in the Commonwealth Government’s net debt toward circa 20% of Australia’s GDP (or indeed of the sum of Commonwealth and State Government debt to circa 40% of GDP) is not obviously a matter of concern and does not signal any urgent need to prioritise a slowing thereof. That said, Australia has made poor use of this debt, with too little being spent on public investment and too much on public consumption (recurrent expenditure). If Australia continues to signal an inability to fund recurrent expenditure without recourse to borrowing, the interest rate at which it borrows may be penalised with a larger risk premium sometime in the future. To date, however, the main loss here is the sum of potential benefits foregone from the worthwhile public investments that governments have failed to execute.

2 - For the reasons stated above, I do not consider slowing the growth in the debt to GDP ratio to be a priority. In contrast – as has been persuasively argued by Saul Eslake in The Conversation – there is a clear case for cutting income tax, to offset the recent increase in the burden of direct taxes on households and in partial recompense for the on-going freeze on real wages. That said, I do not propose that tax cuts be funded by recourse to a higher level of public debt: public debt should be reserved for public investment. Rather, I should prefer to see reductions in income tax funded by reductions in those spending items that deliver zero or minimal additions to welfare and by increases in (and the closing of exemptions from) those taxes that do zero or minimal damage to welfare.


 

Jeffrey Sheen

1 - Disagree

2 - Disagree

1 - Net government debt to GDP in Australia is one of the lowest among similar developed countries, bettered only by Norway, Finland, Sweden and Denmark. Its growth should be slowed and perhaps reversed when the economy is in an upswing, and conversely in a downswing. Right now, the Australian economy is close to normal growth.

2 - Given the buoyant tax revenues in 2018, the upcoming Commonwealth budget should ease outlays and tax rates or thresholds. My preference would be for income rather than corporate tax adjustments, given the declining labour share in the economy. (US corporate tax cuts will have a minimal effect on the Australian economy, and so there is no need for an Australian response.)


 

Julie Toth

1 - Agree

2 - Disagree

1 - Achieving an operating surplus so as to reduce Government debt is a long-term objective. It is not a first-order priority that must be pursued over and above all other Government priorities and objectives. Government debt is not as pressing a problem when the cost of capital is low (such as now).

2 - This dichotomy is not a reasonable policy choice. Both are necessary Budget objectives. Australia sorely needs tax reform that is long-term, evidence-based, holistic and bi-partisan. The Henry tax review, the OECD, the WEF and pretty much everyone else agrees that Australia's tax mix is too heavily reliant on income/production taxes instead of consumption taxes. And it is unnecessarily complex. Tax reform is urgently needed.


 

Joaquin Vespignani

1 - Disagree

2 - Disagree

1 - Debt to GDP ratio in Australia is very and therefore there is no need in reducing debt. The priority should be for the government to invest in infrastructure, research and education to ensure long term economic growth.

2 - Because very low debt to GDP and because other developed countries are in the process of reviewing corporate tax (after the corporate tax cut in the US), corporate tax should be more important to be evaluated.


 

Beth Webster

1 - Strongly disagree

2 - Uncertain (neither agree nor disagree)

1 - Australia ran almost continual budget deficits after WWII and it led to the golden decades of low unemployment and low inflation. National governments can monetise debt and do not have to repay it.

2 - Neither have a lot to offer. Corporate tax cuts as a means of promoting investment is like pushing on a string.