Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Hansard source

If you believe the Labor Party there is no crowding out. There is something absurd about that. Perhaps there is some crowding out. Arguably, the United States, the United Kingdom and the Euro zone are printing money. It works quite well in Weimar Germany and it still works quite well in Zimbabwe, and also in some other places. But there is a certain point where governments have to stop printing money and start pulling back that printed money from the economy. That has a real impact because, ultimately, it means that the only way to stop inflation getting out of control—because of all of this printed money—is to jack up interest rates. That particular time, as interest rates are going up, is exactly when we will be asking business to invest in new plant and equipment and in new enterprise and risk-taking activities. Investment often requires borrowed money. Those businesses will have to borrow at higher inflation rates because they will be competing with the 800-pound gorilla in the market, which is the Australian Office of Financial Management. For example, in Australia the secondary market yield on five-year Commonwealth Treasury bonds is 5.25 per cent. That is three-quarters of a per cent higher than at the time of the May budget. It is a full two percentage points higher than the low this year in February. So it went up from 3.26 per cent on 2 February to 5.25 per cent today. That is the five-year money. It is a massive increase. Private sector borrowing costs are, of course, priced off the Commonwealth benchmark. So the costs of finance for the private sector, which are based in many ways on the yield curve of the Commonwealth bond, have gone up in a similar trajectory. At the same time, the Reserve Bank has been cutting interest rates or leaving them at a stable level. So there is rising concern globally about the global supply of sovereign debt. It is a basic economic equation: supply and demand. If governments around the world, particularly the United States, the United Kingdom and the Euro zone, are issuing bonds, if they are creating a massive supply of government bonds and flooding the market, it will inevitably lead to higher interest rates. Those higher interest rates have to be paid for by not just taxpayers but by everyone, including people who do not pay tax. Everyone will pay a price because those higher interest rates will be built into the cost of everyday goods. They will be built into the cost of food, petrol, operating a car, buying a car or building a house. Those costs will all go up because the cost of running a business will rise directly as a result of the fact that governments have borrowed too much money.

The OECD has warned about the dangers of the rising debt. It notes that the outcome for the global economy could be less favourable if there is a faster increase in bond yields due to sharply deteriorating public finances. What does this mean? Quite simply, it means that, if governments are borrowing money and they are running deficits, they are borrowing money to fund their day-to-day operations; they are borrowing money from the general public. And, if it is not from the general public in Australia, which represents about 40 per cent of the government’s borrowings—the government borrows 40 per cent of its funding from Australian investors—the other 60 per cent has to come from overseas. Australia has always been an importer of money. We have needed to bring money into the country to fund the massive investment in mining and resources in particular. If you have the federal government borrowing hundreds of billions of dollars and if you have the state governments borrowing $230 billion, that money is going to replace the investment of foreigners in private sector investment in Australia, unless the pool gets bigger. The pool of investment is not going to get bigger because other governments around the world are borrowing so much money at the same time. There is only so much money you can borrow.

Too much debt got the world into this mess. Too much debt is not going to save the world from this mess. The countries that are strong economically at the moment are the ones with low debt or no debt. Look at China. China is an economic powerhouse. One of the reasons why it is so strong at the moment is that it has a massive surplus of funds. Some, not all, Middle Eastern countries are in great shape. Why? Because they have a surplus reserve of funds. Australia has been able to ride through this storm in better shape than most other nations. Why? Because the government did not have any debt going into this major downturn. The government not only had zero debt; it actually had surplus funds.

Let us look at countries that are in the worst position, such as Japan. In mid-May Moody’s Investor Services downgraded the Japanese government foreign currency credit rating from AAA to AA2. Japan’s government debt is very large, at more than 170 per cent of gross domestic product. Madam Deputy Speaker, to give you some perspective, that would be close to $2 trillion of government debt in Australia. It is the most indebted nation in the OECD. Do you know how Japan got into this position? It was as a result of its government’s massive spending and borrowing from the early 1990s. Now Japan is in its most severe recession since World War II.

In mid-May Standard & Poor’s switched the United Kingdom’s rating from stable to negative based on the view that the UK’s net general government debt may approach 100 per cent of GDP. This is a direct result of the fact that the UK government, when it should have been running surpluses, was running deficits. After the last few years during the biggest financial services boom in generations, the United Kingdom, particularly with London as the global financial centre, is now in the deepest recession since World War II. And why? One of the reasons is their massive debt burden. They have been running deficits, they have built up this debt and they have no capacity or budget flexibility to be able to address it. And it is most alarming.

There is a great quote from Warren Buffett that I read today. I think the member for Mackellar might be interested in this comment. Warren Buffett, the guru investor in the United States, was asked what he thought of government spending in the US and whether it was going to get them out of their deep hole. Warren Buffett responded:

… you can’t produce a baby in one month by getting nine women pregnant …

It was a good point. What he was effectively saying was that no matter how hard you try just spending so much in one block is not going to deliver your nirvana immediately. You have to be smart and you have to take it gradually. It might take nine months but what you have to make sure of is that what is delivered meets all of the expectations.

That is why the United States has a projected budget deficit for this year of 13 per cent of GDP. Its total accumulated government debt is currently at $11.4 trillion or 80 per cent of GDP. Reports are suggesting debt will go to $19 trillion in the United States—about 130 or 140 per cent of GDP. And think about it: if they have a budget of $3½ to $4 trillion, more than one-third of the US government budget will be interest alone on their debt. Then you have one-third of the budget on defence and one-third of the budget to run the country. This is why it is a sad day and this is why it has been a sad week, primarily from an economic perspective: because this government has taken us past $100 billion of government debt and, what is worse, the debt is growing.

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