Download Australian Federal Government deficits, debt and

Australian Federal
Government deficits,
debt and the stock
market
Introduction
While the media coverage surrounding the budget is full of facts, figures and opinions, much of the debate is clouded
by political rhetoric and misinformation. Here we stick to the facts. This paper puts the current budget into context and
considers what budget deficits mean for investors. In particular:
•
How often have governments produced budget surpluses?
•
How do Labor and Liberal governments compare when it comes to deficits and debt?
•
How serious are the current levels of deficit and debt?
•
Have government deficits been good or bad for stock markets?
History of Federal Government Surpluses, Deficits and Debt
Our first chart shows the history of federal government fiscal balances and debt levels since Federation, and it also shows
the various governments in power. Labor governments are shown in pink and “right leaning” governments in blue. (I have
categorized the Liberal and National/Country Parties, together with the United Australia Party, Protectionist, Fusion, and
Free Trade parties as “right leaning” for the purposes of this discussion).
Our intention here is not to make political comment that one approach is better than the other but rather to use historical
observations to highlight potential impacts for investors.
Chart
Deficits
& Debt
since
federation
Chart1:
1:Federal
FederalGovernment
Government
Deficits
& Debt
since
federation
Federal Govt Deficits & Debt since Federation
+200%
Deficits &
inflation start to
rise from 1965
Federal Govt Surplus /
Deficit (as % of GDP):
+150%
2003-4-5-6-7-8
surpluses
1998-99-2000-1
surpluses
10%
WW2
+100%
+50%
Debt
as %
of
GDP
+0%
1988-99-90-91
surpluses
Postfederation
balanced
budgets
WW1
Federal Govt Debt
(as % of GDP):
0%
Debt burden reduced in
1950s-60s via GDP
growth despite deficits
1933-4-6
surpluses from
depression
austerity
Fraser
Hawke Keating
Whitlam
Rudd Gillard
Keating
Howard Costello
-20%
-30%
Debt as %
GDP
WW2
-50%
WW1
CWG debt around 15% of
GDP (+ another 15% in
State debt)
Debt to GDP well
above 100% in
WW2
1930s
depression
-40%
-100%
1900
1910
1920
1930
1940
1950
1960
1970
Whitlam
McMahon
Hholt
Menzies
Gorton
Chifley
Lyons
Curtin
Bruce
Menzies
Hughes
Scullin
-50%
Barton
Deakin
Watson
Reid
Deakin
Fisher
Cook
Fisher
-150%
-10%
Fraser
1980
Hawke
Keating
1990
Howard
2000
Rudd/
Gillard
-60%
2010
Philo Capital
The top section shows the annual government balance (surplus or deficit) expressed as a percentage of GDP (June years).
We can see that governments have run surpluses (green bars in the top section) in only a very small minority of years.
Chart 2 shows that Labor governments have achieved government surpluses in 18% of all years they have been in power,
while right leaning governments have achieved surpluses in 26% of years in power.
2
Australian Federal Government Deficits, Debt and the Stock Market
Chart 2:
years
Chart
2:Surplus/Deficit
Surplus/Deficit
years
Federal Govt Surplus & Deficits years
100%
90%
23%
18%
26%
80%
% Surplus years
70%
60%
% Deficit years
50%
40%
77%
82%
All
Governments
LEFT
governments
74%
30%
20%
10%
0%
RIGHT
governments
Philo Capital
Surplus years have been few and far between. Aside from the early years of balanced budgets (before Canberra existed!),
the only surplus budget outcomes have been the following:
• 1933, 1934 & 1936 - resulting from the depression austerity plan under Joe Lyons (UAP)
• 1949 (just) under Chifley (Labour)
• 1988-9-90-91 under Hawke/Keating prior to the deficit spending in the 1990-1 recession
• 1998-99-2000-1 under Howard/Costello - prior to the “tech wreck” slowdown
• 2003-4-5-6-7-8 under Howard/Costello (although Kevin Rudd took power during the 2008 fiscal year)
Chart 3 shows that on average Labor have tended to run larger deficits. Even if we just look at the post-war era the
differences are still significant, and reflect the philosophical differences between the major parties over the role of
government in the economy.
Chart
government
balance
sincesince
federation
(as percentage
of GDP) of GDP)
Chart3:3:Median
Median
government
balance
federaon
(as percentage
Median Government Balance
+0.0%
Since Federation
-0.8%
-1.0%
-1.1%
Since 1946
-1.2%
-1.3%
-2.0%
-2.4%
-3.0%
All
Governments
-2.2%
LEFT
governments
RIGHT
governments
Philo Capital
Changes in government fiscal balance
More important than the actual level of government fiscal balance from year to year is the change in the balance. This is
the case for a couple of reasons. The first is that every government inherits the budget position from the last government
and so it has more control over changes in government spending and revenues than it has over the levels of spending and
revenues themselves.
The second reason is that is the change in balance rather than the level that reflect the incumbent government’s fiscal
stance and its effects on the economy. For example if a government goes from a deficit of $40b in one year to a deficit of
“only” $10b in the next year, the $30b in lower spending and/or higher taxes in the second year represents a substantial
tightening of fiscal policy even though the deficit in the second year appears expansionary if viewed in isolation.
3
Australian Federal Government Deficits, Debt and the Stock Market
Chart 4 shows that left wing governments have a slightly better record of reducing deficits over the whole period and also in
the post-war period, although in most cases it was reducing their own deficits, since Labor governments ran larger deficits
overall.
Chart
change
in government
balance
(as percentage
of GDP)of GDP)
Chart4:4:Median
Median
change
in government
balance
(as percentage
Median Change in Government Balance
+0.5%
+0.4%
+0.3%
+0.3%
+0.2%
Since Federation
Since 1946
+0.1%
+0.0%
-0.0%
-0.1%
-0.3%
-0.5%
All
Governments
LEFT
governments
RIGHT
governments
Philo Capital
History of Federal Government Debt
The lower section of chart 1 shows the cumulative Commonwealth debt balance over time since Federation. We can see
that main debt build-ups were caused by the massive deficit spending efforts in the two World Wars.
The debt-to-GDP ratio also increased in the 1930s depression, but it was not due to deficit spending. Between 1929 and
1932 the level of debt was actually reduced by 15% but nominal GDP contracted by a staggering 31% (half of which was
due to a real GDP contraction and the other half was through price deflation).
Australia did not follow a Keynesian deficit spending spree like the US because we simply were not able to. The
commonwealth and state governments had run out of credit in foreign debt markets by 1929, and the government’s then
wholly-owned Commonwealth Bank refused to lend it more money. So the only option was to stick to the savage and
deflationary austerity of the 1931 “Premier’s Plan” and force all holders of domestic government debt into a 22.5% haircut
restructure deal. (This is the current “plan A” for the PIIGS in Europe today.)
The austerity and interest savings from the debt restructure resulted in three government surpluses - in 1933, 1934 and
1936. These were achieved under Joe Lyons’ new United Australia Party, out of which Bob Menzies created the current
Liberal Party. (I have labelled the UAP has being “right leaning” even though Lyons and much of the cabinet and members
had defected from Jim Scullin’s Labor party).
Current level of federal deficits and debt
Chart 1 also shows that the current Rudd/Gillard deficits are similar in scale to the Fraser, Hawke and Keating deficit eras.
Contrary to popular myth the Whitlam era was not one of high deficits or high debt (the only significant deficit was in 1975,
with the budget crisis triggering the controversial change in government.
The next chart shows the interest burden of the government debt - expressed in terms of interest cost as a percentage of
GDP and also interest cost as a percentage of government receipts (mainly tax revenues).
4
Australian Federal Government Deficits, Debt and the Stock Market
Chart 5:5Federal
government
debt and
interest
Chart
: Federal
government
debt
andburden
interest burden
Australia CW Govt Debt & Interest Burden
+200%
Debt as %
GDP
CW Debt as % GDP (left scale)
Interest as % of Gov Revenues (right scale)
Interest as % of GDP (right scale)
+150%
+100%
Interest consumed 30-40% of
Gov revenues in the 1920s
and more than 10% of revenues
in the 1930s and 1940s
Interest burden
as % of Govt
receipts
28%
In 1985-88, Interest
burden around 10% of
Revenues, and more
than 2% of GDP
Interest burden
above 3% of
Revenues, but
less than 1%
of GDP
Interest burden
as % of GDP
+50%
8%
+0%
-2%
Debt as
% GDP
1910
1920
1930
1940
1950
1960
1970
Whitlam
Menzies
McMahon
Curtin
Lyons
Chifley
Bruce
Menzie
Hughes
Scullin
Barton
Deakin
Watson
Reid
Deakin
Fisher
Cook
Fisher
1900
Hholt
Debt to GDP
well above
100% in WW2
-100%
-150%
CW debt around 15%
of GDP + another
15% in State debt
WW2
1930s
depression
WW1
Gorton
-50%
18%
Fraser
1980
Hawke
Keating
1990
-12%
Howard
2000
Rudd/
Gillard
-22%
2010
Philo Capital
The first thing that stands out is the fact that interest on government debt consumed 30-40% of all government revenues
in the 1920s (on a par with the PIIGS and Japan today) and it was still consuming more than 10% of revenues in the 1930s
and 1940s (on a par with the US today). The interest burden was then brought down in the post-war boom in the 1950s
and 1960s.
In recent years the interest burden of government debt was at its lowest level ever in 2007-8 (when the level of debt was
also at its lowest level) but interest costs have risen sharply as the debt level has risen since 2008.
However, the current interest burden (at less than 1% of GDP and around 3-4% of tax receipts) is no higher now than it
was in the 1950s to the 1970s. This is partly due to the relatively low level of debt, and also partly due to the relatively low
interest rates today.
5
Australian Federal Government Deficits, Debt and the Stock Market
Deficits and stock market returns
But what does all of this mean for investors?
Chart 6 shows the annual federal government balance plotted against real total returns from shares (ie including
re-invested dividends and after CPI inflation). These are years ending in June to line up with the fiscal years. Labor
government years are shown in red and right leaning government years are shown in blue.
Chart
6:Federal
Federalgovernment
government
surplus/deficit
-v-total
realreturns
total returns
from- since
shares
- since Federaon
Chart 6:
surplus/deficit
-v- real
from shares
Federation
Federal Govt Surplus/Deficit -v- Real total returns from Shares
- since Federation
+80%
Real Total Return from Shares
+60%
Federal Govt
Deficit
+
Positive real
returns from
shares
+40%
RIGHT governments
1980
2013
1945
1919
+0%
1918
1942
-20%
-40%
2007
1985
1976
1941
2006
1920
2000
1917
2012
1916
1990
1915
1975
2009
Federal Govt
Deficit
+
Negative real
returns from
shares
-60%
-30%
-25%
1933
1987
1922
1946
1943
1944
Federal Govt
Surplus
+
Positive real
returns from
shares
1968
LEFT governments
War-time deficit
spending
+20%
(June years)
1930
1982
1974 Federal Govt
1952
-20%
-15%
-10%
-5%
2008
+0%
Federal Govt Surplus / Deficit (% of GDP)
Surplus
+
Negative real
returns from
shares
+5%
+10%
Philo Capital
Clearly the war-time years at the left of the chart dominate the overall picture - with very large deficits but also good stock
market returns in most years (although returns during WW2 were somewhat affected by war-time limits on share price
movements).
Chart 7 shows the same story but for post-war years only.
6
Australian Federal Government Deficits, Debt and the Stock Market
Chart
7:Federal
Federalgovernment
government
surplus/deficit
-v-total
realreturns
total returns
from- shares
- post 1946
Chart 7:
surplus/deficit
-v- real
from shares
post 1946
Federal Govt Surplus/Deficit -v- Real total returns from Shares
- since 1946
+80%
Federal Govt
Deficit
+
Positive real
returns from
shares
Real Total Return from Shares
+60%
1968
LEFT governments
1987
1960
1985
2012
1969
1975
-20%
Federal Govt
Deficit
+
Negative real
returns from
shares
-60%
-6%
2007
1997
1972 2005
1957 2004 1999
1959
1976
1964 1983
1994
1950
2010
1958
1992
1967
1981 1998
1984
1966
1991
1978
+0%
-40%
1980
1986
2011
+20%
Federal Govt
Surplus
+
Positive real
returns from
shares
RIGHT governments
2013
+40%
(June years)
1977
1973
1965
2000
1990
1989
1956
1971
2009
2006
1949
1988
2008
1974
Federal Govt
Surplus
+
Negative real
returns from
shares
1982
1952
-4%
-2%
+0%
+2%
+4%
Federal Govt Surplus / Deficit (% of GDP)
+6%
Philo Capital
There has been a mildly negative correlation between the government balance and stock market returns. Most of the high
return years from shares were government deficit years (top left section). This includes 2011 and 2013. (Remember all years
are June years in this paper).
Deficits are generally good for shareholders and surpluses are generally bad for shareholders. In the post-war era the
median real total return from shares was 10.8% pa in the deficit years but only 2.4% pa in the surplus years, which is a very
significant difference. This is seen in Chart 8.
Chart
8:Real
Realreturns
returns
from
shares
-v- Government
surplus/deficit
- post-1946
Chart 8:
from
shares
-v- Government
surplus/deficit
- post-1946
Real returns -v- Surplus/Deficit
(post-1946, June years)
12%
10.8%
10%
8.1%
8%
Govt Surplus years
6%
4%
Govt Deficit years
4.2%
2.4%
2%
0%
Median real total
return pa
Average real total
return pa
Philo Capital
There are two main reasons for this. The first is that deficits come about by governments spending more money (and/
or taxing less), and much of the additional cash ends up in company coffers, either directly via contracting directly to
government, or indirectly via household spending.
7
Australian Federal Government Deficits, Debt and the Stock Market
The second reason is one of timing. Deficits tend to be high in mid-late recessions (when tax revenues are down and
welfare spending is up), and this is when shares generally do best, rebounding out of the middle of recessions. This was the
case in 1954, 1972, 1983, 1992 and 2010, (and in the pre-war years: 1922, 1923 and 1932).
There have been very few years when government surpluses accompanied poor returns from shares (bottom right section).
The most obvious instance was 2008, when tax revenues from the boom were still rolling in but shares were already falling
in the GFC.
Lastly we look at the relationship between stock market returns and changes in government fiscal balance, since the
change in the government balance is a better reflection of the government’s fiscal stance and is more controllable by each
incumbent government.
Chart
government
surplus/deficit
-v- real-vtotal
from shares
- post
1946
Chart9:9:Changes
ChangesininFederal
Federal
government
surplus/deficit
realreturns
total returns
from
shares
- post 1946
Change in Surplus/Deficit -v- Real total returns from Shares
- since 1946
+80%
Worsening
Gov Balance
+
Positive real
returns from
shares
Real Total Return from Shares
+60%
+40%
1992 1963
2010
LEFT governments
1980
Mostly early
recovery years
1983
2013
1987
2009
1959 1997
1976
1950
1954
1967 1958
1984 1993
-40%
-60%
-6%
1975
-4%
-2%
1985
1957
2007
2006
1999 1996
2000
1981
1998
2011
1948
1969
1977
1949 1965 1988
2008
Big
recession
years
Worsening
Gov Balance
+
Negative real
returns from
shares
Mostly boom
years
1986 1960
2002
-20%
Improving
Govt Balance
+
Positive real
returns from
shares
RIGHT governments
1968
+20%
+0%
(June years)
1973
2012
1982
Improving
Gov Balance
+
Negative real
returns from
shares
1974
1952
+0%
+2%
+4%
Change in Federal Govt Surplus / Deficit (% of GDP)
+6%
Philo Capital
Here we see much less of a clear pattern. In the top left section are years with worsening budget balances but good returns
from shares - many of which are early recovery years.
Again the explanation is largely one of timing. Early-mid recessions are generally periods of worsening budget balances and
also poor returns from shares. Conversely, early-mid booms are generally periods of improving budget balances and are
also generally good for shares.
8
Australian Federal Government Deficits, Debt and the Stock Market
Chart 10:
from
shares
-v- Changes
in Government
surplus/deficit
- post-1946
Chart
10:Real
Realreturns
returns
from
shares
-v- Changes
in Government
surplus/deficit
- post-1946
Real returns -v- Changes in Gov Balance
(post-1946, June years)
12%
10%
10.2%
8.5%
8%
7.8%
6.2%
6%
Worsening
government balance
Improving government
balance
4%
2%
0%
Median real total
return pa
Average real total
return pa
Philo Capital
However the differences are not as significant as the stark differences in returns in deficit years versus surplus years (above).
Some conclusions
We hope that his brief paper adds some factual context to the current highly charged debate.
We can draw some conclusions from these observations:
• Government deficit years have generally been good years for stock market returns. 2013-4 will most probably be a
deficit year (as was 2012-3)
• Years of fiscal tightening have been a little better for stock market returns than years of fiscal loosening. 2013-4 will most
probably be a year of fiscal tightening (as was 2012-3)
• In the post-war era, Labour has produced four surplus years against the Liberals’ eleven. (In the pre-war era, the big
debt build-ups in WW1 and WW2 were bi-partisan, but the 1930s surpluses were a result of partisan austerity measures
of the UAP (fore-runner to Liberal Party).
• Today’s level of government debt is much lower than it was in the two World Wars and in the 1930s depression
(although the 1930s debt was primarily the result of 1920’s boom-time profligate spending - largely by the NSW state
government - and not the result of stimulus spending)
• The current interest burden (at less than 1% of GDP and around 3-4% of tax receipts) is no higher now than it was in the
1950s, 1960s and 1970s.
• The Pre-WW1 period was a golden era of balanced budgets and no Canberra!
9
Australian Federal Government Deficits, Debt and the Stock Market
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