PEFO farce hides debt interest danger

Right now, every one of you – man, woman, child and even new-born baby – owes around $35k of federal debt, and it’s going to be going up relentlessly every year, pretty much forever.

Right now, every person in Australia owes around $35k of federal debt.

It’s not only home loan borrowers who are going to be singed – the more recent ones, well and truly burned – by higher interest rates, it’s also going to be the Federal and indeed all state governments bar got-iron ore lucky WA.

That is to say, you – all 26m of you; because all government debt is really your debt.

Right now, every one of you – man, woman, child and even new-born baby – owes around $35k of federal debt, and it’s going to be going up relentlessly every year, pretty much forever.

Then add on the state debt, with the 6.6m Victorians top of the pops thanks to Chairman Dan’s infrastructure and CO2-emitting concrete megalomania.

Every Victorian owes another $24k or so, with an ‘update’ coming in two weeks.

Importantly, pungently, you ‘service’ those debts not by paying interest directly, but in higher taxes and charges and lower government spending than otherwise, and of course yet more deficits and higher debt. This came to mind, looking at the fiscal farce, more formally known as the PEFO or Pre-election Economic and Fiscal Outlook.

The PEFO was initiated purportedly to have the heads of Treasury and Finance prepare their own numbers, fully independent of their political overlords, so we’d have an objective statistical basis for the campaign.

It is in fact a complete farce; Treasury and Finance are never going to and never have produced a PEFO which effectively states all the numbers in the immediately preceding budget were completely or even just materially wrong or false.

In effect, we have Treasury and Finance ‘auditing’ the budget numbers and economic forecasts that had been produced barely a month ago by – what do you know - Treasury and Finance, and concluding that, well, they were all accurate.

Well, accurate might not be quite the right word. As I’ve argued over the years – indeed decades - the one thing they never are is ‘accurate’.

The one thing you can take to the bank is that every number in the budget – apart of course for the historical ones – will be wrong in outcome. So what we saw in the PEFO was utterly trivial adjustments to some of the numbers. You’ll be over the moon to know that by June 2026 net federal debt will be down to only $864.5bn compared with the $864.7bn projected in the budget.

Australia net federal debt will be $864.5bn by June 2026.

Champagne corks will be popping across the land over that news.

I really don’t know which is more indicative of utter ivory tower idiocy: the meaningless adjustment or the complete inability to understand the more fundamental meaninglessness of such exact figures in the first place.

If Treasury said net debt by 2026 would be in the range of say, $850bn to $900bn, it’d be lucky to be right.

Underlying the idiocy is an assumption about the interest paid on that debt; that it is going to stay as low as it is today; and that the budget deficits will fall as predicted.

The first part is relatively well-founded. The bonds – with their fixed interest payments – so far as funding the existing debt is concerned have mostly already been issued.

But along the way we will have new issues, both to fund the new deficits and to repay shorter-term borrowings.

The interest to be paid on them could be very significantly greater than Treasury is projecting based on the bond yield curve as it currently sits. Plus the deficits might not fall as predicted – hoped for?

If only Treasury had locked in more debt for 30 years – or indeed even the 40 years of the bond that CSL has just issued – when rates were so ridiculously low thanks to all the central bank money printing.

It didn’t and you have the pleasure of paying for it.