Monday, 13 February 2012

RBA Supports Ongoing Increase in Gross Government Debt

At the Bloomberg function in Sydney this morning, I had the opportunity to ask RBA Assistant Governor, Guy Debelle, about liquidity in the Commonwealth Government bond market.  This is a critical issue for Australian market stability.

While I do not want to verbal Dr Debelle, he confirmed that the RBA was a strong supporter of maintaining liquidity in the bond market by having the amount of gross government debt steady at around 12% of GDP.  This is also the position of market participants, the ASX, Treasury, APRA and anybody with knowledge of the critical importance to Australia's international standing in global markets.

Quite mechanically, this means that as GDP grows, the amount of gross debt grows.  A very, very basic concept...agree?

It looks like Australia's GDP will grow at around 5.5% or so over the long run.  This means that gross debt WILL rise by 5.5% per annum over the long run.  For the next decade or so, it means a rise of $7 to $10 billion a year in gross debt, even though in a few months, the government will be running a surplus.

All of which makes the comments of the Opposition about reducing gross debt a significant risk to market stability.  If, as Abbott, Hockey, Robb and Joyce suggest, a Coalition government was to reduce gross debt, the flight of capital from the Australian bond market could be enough to derail the economy.

The Opposition needs to clarify its position on its debt target, a point humiliatingly exposed by Wyatt Roy's childish question in the House yesterday.

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