‘Debt and deficit’ is the bogeyman that helped the Coalition crush Labor in the 2013 election, but since the May budget it has rarely been invoked.
That’s not because there has been any change to the status quo. The government is still borrowing hundreds of millions of dollars every week.
Rather, it’s because, first, the government has failed to devise a compelling strategy to fix the deficit; and second, Treasurer Joe Hockey has realised that by talking down the economy, he is spooking businesses and consumers.
During the past week, Mr Hockey radically changed his tune, saying on ABC radio: “When you’ve got one of the fastest-growing economies in the developed world in the first three months of this year, for some people to talk about dark clouds on the horizon or recession, they’re just made to look like complete fools.”
That’s a far cry from the Coalition’s “budget emergency” rhetoric of 2013, when Australia was, ironically, in much better economic shape.
So what does that mean?
In short, it means Australia will be issuing tens of billions of dollars of debt every year for many years to come.
Okay. But how exactly does that work? And who are we borrowing from? Before we go into that, here’s a quick definition of debt and deficit.
Budget deficit: the difference between the government’s spending commitments and its total tax revenue (when negative – when positive it’s a surplus).
Government debt: the total amount the government owes to lenders (currently $364 billion).
How the government issues debt
Every day, the government must cough up a huge amount of money to fund its legislated spending commitments. These include public servants’ salaries, dole and pension payments, medicare payments, military, education and infrastructure spending, and so on.
How much these cost is unpredictable. The number of people claiming the dole, for example, depends upon factors out of the government’s control. But it is the nature of legislated spending that the government must make the payments, regardless of how much they cost.
When the government finds it doesn’t have enough money in the Treasury coffers to cover these payments, it is left with no option but to borrow.
Enter the Australian Office of Financial Management, or the AOFM.
The AOFM is a government agency within Treasury that overseas the issuance of government bonds and other debt instruments. Its role is functional, not political. It monitors Treasury’s daily spending commitments, and when it finds there is a shortfall of cash, it arranges the issuance of government bonds through an auction. This is a decision based purely on the maths; if there’s a shortfall, bonds are issued. Mr Hockey has no role in the process.
The last time the AOFM held a Treasury bond auction was on Friday, when it issued $1.5 billion worth of five-year bonds. In May, it conducted nine auctions and issued $7.1 billion worth of bonds (‘issue bonds’ means ‘borrow money’ – a bond is effectively a promise to repay the lender the principal amount of money, plus interest).
Since the Abbott government came to power in September 2013, it has issued $134 billion worth of Treasury bonds. In its six years in power, the Rudd-Gillard governments issued $270 billion of Treasury bonds. That means the Abbott government is borrowing at a higher rate.
So, who buys them?
This is a key question, because it will tell us exactly who we owe money to. Unfortunately, it is almost impossible to find out.
The AOFM would not reveal to The New Daily who bought those $1.5 billion worth of bonds on Friday. But even if it had, it wouldn’t have been a great help.
That’s because the institutions that buy Treasury bonds – all of which are banks – very rarely hold onto them. They either buy them on behalf of clients, which include pension funds and insurance companies, or they trade them themselves on bond markets.
The banks that buy Treasury bonds directly from the AOFM through ‘blind’ online auctions are called ‘active market makers’, and the AOFM names them here. They include Australia’s big four banks plus Macquarie, as well as a host of foreign banks, such as Citi, Deutsche Bank, JP Morgan Chase, Goldman Sachs, UBS, HSBC and Royal Bank of Canada.
What these banks do with the bonds is their business, and is a subject for another article. Suffice to say, the international bond market is so complicated it’s enough to make anyone-but-a-bond-expert’s head explode.