The importance of reducing debt

Brian Fallow in the Herald looks at why we now have a debt problem:

Over the past five years, government spending has increased by 50 per cent – twice as fast as the economy or tax revenues have grown.

Even in the same budget as which Dr Cullen finally gave tax cuts, he still increased spending by $4.5 billion. He didn’t even leave enough money for his Super Fund contributions – and that was before the flobal recession.

But now tax revenues are falling as the recession lays waste to the tax base. Treasury secretary John Whitehead says it will be some time in 2011 before the level of economic activity is back to where it was in 2007.

So three or more years of no extra income, yet the continual spending increases give us a huge deficit and debt problem.

This would see gross government debt double by 2013, relative to the size of the economy, and in the absence of a policy response climb to over 75 per cent of GDP by 2023. That is where it peaked in 1987; only by 2023 there will be the added pressure of baby-boomer pressure on health and superannuation costs.

This is what the situation would be under Labour. Labour have condemned basically every saving National has made, and just demanded more and more spending.

Whitehead in a speech on May 15 spelled out what that level of debt would mean. It would be $49,000 for every man woman and child in the country: “A family of four would basically have another mortgage of close to $200,000”.

$200,000 debt for a four person family. Not much of a future.

“But as we see it the most effective way the Government can begin to get on top of expenses is by reducing the spending allowances for future Budgets, currently set at $1.75 billion for the 2009 Budget and increasing by 2 per cent a year in each of the next three Budgets.”

Over four years that provision is a cumulative $18 billion in new spending. “We expect the Government to halve those spending allowances,” Purdue said.

Reducing the provision is sensible. In the late 1990s it was only $600 million a year. At $600 million a year then over four years it is only $6 billion as opposed to $18 billion.