Home' Policy Magazine : Policy Vol 33 - No 1 Contents LIVING ON BORROWED TIME: THE TROUBLE WITH PUBLIC DEBT
8 POLICY • Vol. 33 No. 1 • Autumn 2017
spending to cover the costs of aging populations, of
needed infrastructure, those due to climate change
and other costs? This question must be addressed.
I might conclude this article with a few comments
on Australia’s recent fiscal developments. According
to the latest IMF data,32 in 2007, the last year before
the GFC, the general government expenditure
of Australia was 34.4% of GDP while its general
government revenue was 35.8%, thus giving the
country a general government net surplus of 1.5%
of GDP. In that year, general government gross debt
was only 9.7% of GDP, one of the lowest among
OECD countries. By 2016, Australia’s public
spending had risen to 37.6% of GDP and its fiscal
balance (that in 2008 had become a deficit and in
2010 had reached the high level of 5.1%) was still
close to 3%. Not surprisingly, general government
gross debt had risen from 9.7% in 2007 to 40.9%
in 2016 in spite of low borrowing rates. This
change indicates how quickly comfortable fiscal
situations can turn into worrisome ones.
I have argued elsewhere that public spending
of a range between 30% to 35% of GDP ought to
be sufficient for governments to satisfy the social
needs that require public spending. The total debt
of Australia (public plus private debt) is well over
200% of GDP, and age-related and other pressures
for higher public spending that are likely to appear
in future years will also be present in Australia, as
they will be in other countries. The conclusion
must be that letting recent trends continue, or even
worse using what some call ‘fiscal space’ to increase
spending, might be a grave mistake.
1 Hans-Verner Sinn, Eurotrap (Oxford University Press,
2 For instance, in 43 BC Cicero wrote: ‘The national
budget must be balanced. The public debt must be
reduced and controlled. The arrogance of the authorities
must be moderated and controlled. Payments to foreign
governments must be reduced if the nation does not want
to go bankrupt.’
3 Some 17 centuries after Cicero—and when Adam Smith
was working on The Wealth of Nations—David Hume
wrote that: ‘It is very tempting for a minister to employ
such an expedient [i.e. public borrowing’] as it enables
him to make a great figure during his administration
without overburdening the people with taxes, or excercising
immediate clamours against himself. The practice,
therefore, of contracting debt will almost infallibly be
abused in every government’. See David Hume, Writings on
Economics, edited by Eugene Rotwein (Madison: University
of Wisconsin Press,  1937), 92.
4 See detailed accounts in Adam Smith The Wealth of Nations
(New York: The Modern Library,  1937) and Paul
Leroy-Beaulieu, Traité de la Science des Finances (Paris:
Guillaumin et C.le Libraires, 1888).
5 The golden rule states that spending from public investment
should be excluded from the estimate of a country’s fiscal
6 Vito Tanzi and Hamid Davoodi, ‘Corruption, Public
Investment and Growth’, in The Welfare State, Public
Investment and Growth, edited by H. Shibata and T. Ihori
7 By up to 40% in Italy, as was reported in 2014. See
Vito Tanzi, ‘Roads to Nowhere: How Corruption in
Public Investment Hurts Growth’, in New Perspectives on
Combating Corruption (Transparency International and The
World Bank, 1998).
8 See Vito Tanzi, ‘Fiscal and Monetary Policies During the
Great Depression: A Critical Evaluation’, Comparative
Economic Studies 57 (2015), 243-275 and Vito Tanzi, ‘Crises,
Initial Conditions and Economic Policies’, in Symposium
on Structural Reforms and Fiscal Consolidation: Trade-Offs
or Complements?, Federal Ministry of Finance of Germany
(Berlin: 25 March 2015).
9 Bradford J. DeLong and Lawrence H. Summers, ‘Fiscal
Policy in a Depressed Economy’, Brookings Papers on
Economic Activity (2012), 233- 297.
10 Joseph E. Stiglitz, ‘The Politics of Economic Stupidity’,
Project Syndicate (20 January 2015).
11 These include past Nobel Prize winners such as Hayek,
Friedman and Buchanan as well as living Nobels such as
Lucas, Sargent, Phelps, Fama, Kydland, Prescott and Sims,
all of whom hold or held widely different views.
12 For one of many examples, see Paul Krugman, ‘Secular
Stagnation, Coalmines, Bubbles and Larry Summers’, The
New York Times blog (16 November 2016).
[Australia’s] general government gross
debt has risen from 9.7% in 2007 to 40.9% in
2016 in spite of low borrowing rates.
This change indicates how quickly
comfortable fiscal situations can turn
into worrisome ones.
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