The ceilings the limit

Colleen Ricci

Prime Minister Tony Abbott, Communications Minister Malcolm Turnbull and Treasurer Joe Hockey consider their strategy. Photo: Alex Ellinghausen

The federal government is seeking to increase the nation’s debt ceiling by $200 billion.

The debt ceiling is the maximum amount of debt the Australian government is allowed to accrue by law, a sum that can only be changed by an amendment passed by both the House of Representatives and the Senate. Although originally an American concept, the debt ceiling has been adopted by other countries to manage their budgets, including Denmark and Canada. It was introduced to Australia by the former Labor government in 2008 with a starting amount of $75 billion.

What is the government’s proposal?

Financial forecasts indicate Australia’s current debt ceiling of $300 billion will be exceeded by mid-December and debt will peak at $370 billion by 2016. To manage this, the government proposes increasing debt by $200 billion to reach a new debt-ceiling of $500 billion. This amount would include a «buffer» of between $40 billion and $60 billion above the expected peak to safeguard against unforeseen variables, as advised by the Australian Office of Financial Management.

Prime Minister Tony Abbott blamed the previous Labor government for the inherited «mess». He justified the $500 billion debt-ceiling as «the only way to be absolutely confident that we will never again have to go to the Parliament» to request more. However, many describe the sizeable $200 billion request as extraordinary; particularly after the Coalition’s heavy focus on «bringing down the debt» before the election.

Why was the amendment blocked?

Treasurer Joe Hockey’s amendment bill was recently passed in the lower house, where the government has a strong majority, but it was blocked in the Senate where the balance of power is held by Labor and the Greens. They claim the government has come «nowhere near close» to justifying the need for such a large amount, arguing instead for a more modest increase of $100 billion, which would raise the debt ceiling to $400 billion. Shadow treasurer Chris Bowen argued that «if Joe Hockey wants another $100 billion on top of that, he has to open his books so everyone can see why he needs the increase». To date, the government has not released details of the midyear budget review, which would update currently held financial forecasts. However, Opposition Leader Bill Shorten has been offered a confidential briefing.

Mr Hockey rejected the $100 billion compromise as inadequate and accused opponents of playing political games. He warned there could be a US-style shutdown of federal government services if the amendment is not passed. Mr Abbott accused those opposed of behaving like American Tea Party Republicans determined to induce «some kind of crisis for our country».

Are comparisons with the recent US crisis realistic?

Comparisons with the US are references to the recent gridlock that enveloped the American government over President Barack Obama’s healthcare program and debt-ceiling requirements. This impasse led to a partial government shutdown, which reportedly cost the US economy $24 billion. The crisis was narrowly averted with the debt ceiling raised by $305 billion to $16.7 trillion.

Mr Abbott and Mr Hockey have been accused of overreach and hyperbole in likening Australia’s situation to the US. Commentators say the «tremendous uncertainty» experienced there would not be repeated here; Australia’s political system is more centralised and Parliament already decides how much money is spent when it approves legislation. Also, Australia has the option of dissolving both houses of Parliament and holding a new federal election, known as a double dissolution, if there is a deadlock, an option unavailable in the US system.

Why does Australia have debt?

While federal spending has risen in recent years, revenue raised by governments through various taxes has not kept pace. Reconciling the difference between spending and revenue while finding money for infrastructure projects that will keep the nation’s economy buoyant particularly as the mining boom declines is a serious task. A commission of audit has been set up to identify areas of waste and inefficiency within the federal budget in an effort to find savings.

By international standards, however, Australia’s debt is low. Economists say that even with a $500 billion debt ceiling, the debt is manageable because it represents only a third of the nation’s income of $1.5 trillion, otherwise known as gross domestic product. The low debt-to-GDP ratio (33 per cent) means Australia can produce and sell enough goods and services to ensure it can repay its debt without incurring more. By contrast, the US debt-to-GDP ratio is more than 100 per cent.

What is the response?

Some claim the $200 billion request is a «perverse response» to what the Coalition repeatedly claimed, before the election, was a «budget emergency». They say it equates to an admission that current debt levels are sustainable after all and suggest that Mr Hockey moderate his «propensity for hyperbole». Others criticise Labor’s response, saying it is more about payback for Mr Hockey’s persistent hounding over Labor’s debt levels while in government. Many label the stoush as a storm in a teacup more akin to political posturing than anything else.

Numerous commentators argue that the debt-ceiling is meaningless and should be abolished. They say it is not a real, enforceable limit such as those imposed by banks on their borrowers because there is no serious penalty attached if breached. Economics commentator Malcolm Maiden says the debt-ceiling is more about «the optics of fiscal discipline rather than fiscal discipline itself». Others say it merely provides the opposition with more opportunities for grandstanding and point-scoring.

Recent headlines

«Joe Hockey warns of debt deal gridlock», The Australian. November 14

«Hockey threatens US-style shutdown over debt limit», Herald Sun. November 13

«Surreal nature of brawl over debt ceiling», The Age. November 15

«Debt ceiling all because of West WingThe Sydney Morning Herald. October 24

«Once again the hypocrisy of the Coalition’s claims in opposition is exposed. First it was the private plundering of MPs’ entitlements while publicly condemning wasteful spending. Now promises to cut debt to ‘bring the budget under control’ are being tested by the realities of government. Having long insisted the rise in debt during the worst global recession in 80 years was not a budgetary ‘disaster’, The Age welcomes Mr Hockey’s change of heart. A $200 billion jump in the debt limit nonetheless demands a better explanation than Mr Hockey offered. Comparisons with the US debt standoff are ludicrous.»

Editorial opinion, October 24

What people say

The ceilings the limit

«[The debt ceiling] only provides an opportunity for the opposition of the day to engage in ritualised grandstanding. The Coalition in opposition was exceptionally good at it and now Labor is engaging in payback.»

Economist Saul Eslake, The Australian. November 15

«If Joe Hockey went to a bank and saw a bank manager with a justification for a loan as flimsy as this, he’d be laughed out of the bank.»

Shadow treasurer Chris Bowen, The Canberra Times. November 17

«Debt blowout is the result of six years of socialist government handing out money and conditioning a large proportion of the population to depend on the politics of handouts. The party is over, and like all parties there is a mess to clean up.»

Rick Atkinson, The Sydney Morning Herald. November 14

«Tony Abbott is concerned about debt. At the same time his priorities are repealing the carbon tax and the mining tax, cutting the company tax rate and not proceeding with Labor’s fringe benefits tax arrangements for lease vehicles, all measures resulting in reduced income for the government. He also intends to implement his «direct action» policy on climate change and his generous paid parental leave scheme, both resulting in increased expenditure.»

Barry Spooner, The Sydney Morning Herald. November 14

«Shutdown threat over debt ceiling? I don’t appreciate the Treasurer morphing into the son of Uncle Sam. What next? Printing ‘In God we trust’ on Australian currency?»

Roger Clark, The Sydney Morning Herald. November 15

Australian government Treasury

2012-2013 Budget Outcome

Is it a good idea to increase the debt ceiling by $200 billion? Why/Why not? What spending would you cut to alleviate debt?

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