The age of entitlement is back in Australia

The age of entitlement is back in Australia. Some thoughts on the recent Federal budget.

Daniel Wild:

This is a budget that Labor would have been proud to deliver because it commits Australia to permanently higher spending, higher taxes, and higher debt, without offering any economic reform.

Terry McCrann:

If it’s OK for someone to borrow a million at a 2 per cent interest rate to buy a house, surely it’s even better for a treasurer to borrow a trillion even cheaper at just 1 per cent?

Until rates go up. The budget fine print assumes we’ll be paying just $17bn of interest on that $981bn of debt in 2024-25. That’s an interest rate of just 2 per cent.

What if it’s 6 per cent? Suddenly that’s another $40bn on the deficit, every year

Thus, governments have a massive incentive to keep interest rates very low. (The most extreme case is Japan, which would need to spend all its tax revenue on paying the interest on its borrowings if the interest rate even reached 2% in Japan.)

Hence the bubble, caused by cheap money, will continue. A massive or prolonged inflation is thus locked in.

The last time inflation took hold, in the 1970s, the public servants had to raise interest rates to 20% to stop it. Who can afford 20% interest rates today? So it won’t happen. So inflation will roar. (Got gold?)

John Roskam:

It’s not immediately obvious how next week’s federal budget from the Morrison government will be much different from one that would have been delivered by a Shorten government or might be delivered this time next year by a possible Albanese or Plibersek or Chalmers government.

Daniel Wild:

This is why the age of entitlement is back. And the era of reform is over.

Whereas the spending increases in the budget are significant and permanent — such as to child care and welfare — the tax relief is small and temporary. …

Total federal government debt is now just shy of $1 trillion, and will cross that threshold for the first time in our nation’s history sometime in the next 12-18 months.

One trillion dollars of debt is the equivalent to 50 per cent of GDP, which is more than double what it was during the Whitlam era. And it represents $37,500 for every person in Australia, which is a staggering 1,300 per cent increase since the eve of the Global Financial Crisis. …

The lessons of the 1970s are about to be relearned

It would perhaps be understandable, even desirable, if debt was being invested in productive assets that deliver long-term benefits to future generations, such as constructing more dams, coal-fired power, or nuclear power. But instead the government is borrowing money to subsidise child care for high-income, inner-city lawyers and doctors. …

The temptation for a future Coalition or Labor government will be to avoid tax hikes and seek to inflate the debt away. This is what has happened so far. …

It may be tempting for the government to suppose that it can keep debt under control through modest rates of inflation. However, history shows that once inflation begins to increase, it is very difficult to bring it under control.

The debt will never be paid back in dollars worth anything like today’s dollars. Instead, it will be inflated away, which is the only politically acceptable solution. Every paper currency in the history of the world has always ended this way. The average lifetime of a paper currency — and there have been over a thousand to date — is two generations, or 50 years. Technically, our western currencies became purely paper (or “fiat”) in 1971, exactly 50 years ago!

Every western country is doing roughly the same thing. Only the details differ.