How does government debt affect social purpose organisations?
27 April 2022 at 5:29 pm
Federal government debt is on track to hit $1 trillion in coming years. As election sparring heats up, both major parties claim they’re best to manage it. But how does debt affect the social purpose sector? Neil Pharaoh explains.
When the ALP won government in 2007, federal government debt was around $60 billion. When they finished office in 2013 having weathered the global economic recession of 2007-2009, debt was around $250 billion. The Liberal National Party took this $250 billion and more than doubled it prior to the pandemic, with debt sitting at around $550 billion pre-COVID 19. The pandemic added another $300 odd billion to this mix. The chart below illustrates the climbing debt level.
What does this all mean? There are three key takeaways for the social purpose sector:
- There is actually plenty of government money washing around, despite constant claims “there isn’t enough money for social services” and “expect cuts”.
- Political will moves spending decisions. If you are not participating in the process, you are missing out.
- Look at spending decisions over time; achieving outcomes requires stamina and commitment, and that comes from great strategic thinking and planning.
Examining these more closely; there’s plenty of government money washing around – and Liberal governments in Australia have historically (believe it or not) been higher taxing than Labor governments. Labor governments historically average 21-22 per cent of GDP as tax revenue, Liberal governments 23-24 per cent of GDP as tax revenue. This means that one out of every four dollars of our GDP goes to the government. Total expenses in the last budget were around $600 billion.
When we dive into the detail around this spending, the priorities, focus, and investment decisions made by the government are clearer.
So when you hear “there isn’t enough money for social services” and “expect cuts” you need to think of this point differently – what they’re really saying is “you are not annoying enough, loud enough, or political enough to secure your priorities”.
Secondly, political will moves spending decisions. If you are not participating in the process, you are missing out. Political decisions dictate who gets money and how much. Those decisions occur across five key stakeholder groups – ministers (or shadows), elected MP’s, policy departments, central agencies, and the political parties themselves.
Work undertaken by Tanck shows that even small decisions often pass through over 100 people, before being announced across those five stakeholder groups. You need to maximise political will across all these stakeholder groups – and it needs to be sustained, structural and systemic.
When I first started using the term “government engagement” over a decade ago, it was considered new – people understood lobbying, campaigning and advocacy, and government relations – but “government engagement” was new. The reason we developed this term was because it speaks to the sustained nature required to build political will, and impact spending decisions.
A lobbyist can secure a quick flash in the fire, but sustained impact is what will shift the dial on funding and social issues.
Sustained impact takes me to my final point. If you look at spending decisions over time; achieving outcomes requires stamina and commitment, and that comes from great strategic thinking and planning.
You need to think of short-, medium-, and long-term funding horizons, and both the mid-year economic updates and budget and election cycles should be front and centre of your strategic planning, aspirations and strategy as a not for profit. If you are doing these things in isolation and not aligning external factors with internal ones, you won’t secure sustained impact.
Finally, we also need to consider the entire sector working together to change the narrative. “What narrative” do you ask? That Australia is “high taxing” – by OECD measures, Australia ranks 30th (out of 38) when it comes to “size of government taxation” relative to GDP of the economy.
Those bottom-taxing countries, near which Australia sits, are hardly an aspiration for us. They include Mexico, Columbia, Chile, Turkey, the USA and others. All of the “comparison” countries, as far as social services and economic outcomes, are larger taxing than Australia – Denmark, France, Belgium, Italy, Sweden, Spain, Israel, even Hungary, Estonia, Latvia, and both the UK and NZ take more tax, and thus spend more on social and other government services.
Sure, Australia has a heap of debt, and it is on track for $1 trillion thanks to our current federal government, but we are also low taxing – the result means a squeeze on social and economic supports, education and health, and clamping down expenditure going forward. You can either beat this by being more strategic, louder and more active individually for your organisation, or we (as a sector) must focus on our revenue initiatives in budgets as much as our expenditure.
While a $1 trillion deficit is huge – and it is accelerating – if our taxes in Australia (as a percent of GDP) equalled that of the OECD average, we would have had an additional $105 billion to spend in this year’s budget. This – give or take a few billion – would have resulted in close to a balanced budget, even with COVID impacts. And that is something to think about.
About the author: Neil Pharaoh has spent most of his voluntary and professional life in and around social purpose organisations, government, public policy and advocacy. Neil has been behind many leading social policy and advocacy campaigns on gender rights, equality, medical research and education, and ran for Parliament in Victoria in 2014 and 2018. Neil is co-founder and director of Tanck, which focuses on better engagement with government, and regularly runs workshops and advocacy sessions and advises leading social purpose organisations on their government engagement strategy and systems.
Happenings on the Hill is a fortnightly column focusing on all things politics, policy, campaigns and advocacy. Stay tuned for updates around political trends and elections, lobbying and advocacy news, and hints, tips and ideas on government engagement that are specifically written for the social purpose/for purpose sector.
If you have any ideas, suggestions, tips or questions, please feel free to email Neil Pharaoh at neil@tanck.com.au or reach out to him via Tanck social media: on LinkedIn, Twitter, Facebook and Instagram.
You mean assets for everyone else but the Federal Government.
TAXES DO NOT PAY for Federal Government spending… rather the Federal Government must spend as the monopoly issuer of the AUD via the Reserve Bank of Australia Act of 1959, before anyone has AUD to pay TAXES.
Learn how sovereign currency works… because the wealthy corporates certainly know and take advantage of it!
We are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The “deficit” is not an economic sin but an economic necessity.” ~ William Vickery Nobel Laureate. Vickrey was awarded the 1996 Nobel Memorial Prize in Economic Sciences
Based on defintion of sovereign currency and the role of the RBA, apply some simple logic with basic accounting knowledge, and legislation which you can look up and it is clear that the taxpayers money narrative is one huge myth.
a) Australia is a sovereign money nation… What that means is the AUD is unique to Australia.
Sovereign money is legal tender issued by a monetary authority, in most cases by a nation-state’s “independent” central bank. In Australian that is the RBA.
b) Central Bank (The RBA) is an integral part of the financial and economic system. They are usually owned by the government (in Australia’s case by the Commonwealth of Australia) and they are given certain functions by legislation raised by the Federal Government to fulfil. These include printing/creating money (which primarily occurs via key strokes in a computer every time they spend), operating monetary policy, lender of last resort (to the commercial banking system) and ensuring the stability of financial system. Ever hear of “supply bills”, those are the instructions from parliament to the RBA to fund spending by creation of money.
Based on this information it is clear that the monopoly creator of the AUD is the Federal Government via the Reserve Bank of Australia. Making state and local Governments along with everyone else money users.
And we know this because if anyone else tried to create the AUD they’d end up in prison for counterfeiting.
So from an understanding of sovereign money and the central bank, we know that logically Australia along with other sovereign money nations must be a spend then tax economy… the Federal Government spends money into existence. From an accounting prospective that creates a Liability for Government, and an asset for whomever the recipient of that Government spending is. As the Government is the source of money and the creation of money creates a Liability for the Government, we then know when people pay taxes it simply reduces that initial liability. Thus basic Accounting General Journal Ledger principles clearly show it is impossible for taxation to fund Federal Government spending. Note: Banks create credit not currency which they do under Government licence and we already know due to the function of the Central Bank that they underwrite that “credit”… lender of last resort.
The mathematical equation of the above is Sectoral Balances which state:
(G – T) = (S – I) – (X – M)
The above linear equation states that government spending (G) minus taxation (T) will equal savings (S) minus investment (I) minus exports (X) minus imports (M). In general terms, whatever the federal government spends minus taxation, that exact amount will be deposited in and distributed between the domestic private sector and the external sector as income. We can now aggregate (put together) the right side of the equation using brackets and define two sectors:
(G – T) = [(S – I) – (X – M)]
In other words…
The Federal government sector = The non-federal government sector
OR quite simply put: The Federal government sector’s deficit is the non- federal government sector’s income.
The Government’s red ink IS the Private sectors black ink.
A Government surplus = Private sector debt.
AND as the Federal Government is the monopoly issuer of the AUD they have no affordability issues as money is infinite. The restriction is real resources including labour to produce or do the work.
Dr Steven Hail….
https://youtu.be/qBpm5sVmGYc
Also read The Deficit Myth by Professor Stephanie Kelton
Reclaiming the State by Professor Bill Mitchell