This year marks the 20th anniversary since the Howard government – having run budget surpluses for a decade – announced that the government’s net debt had fallen to zero. In April, Liberals and conservative pundits posted mournful recollections of “Debt Free Day” on 21st April 2006, when Treasurer Peter Costello announced the Commonwealth had “paid off the mortgage”.
In our politics and media, both sides of the political spectrum have accepted this as a desirable and unambiguously positive thing. Conservatives harken back to the Howard/Costello surpluses as a “golden era” of “responsible economic management”. Meanwhile, though progressives critique Howard/Costello for how they went about it, they are in complete agreement as to the ends, accepting government surpluses and debt reduction as desirable scenarios.
The critique we hear from progressives is that Costello “achieved” the surpluses by implementing regressive tax reforms and selling-off Australia’s publicly owned assets to private investors. And they’re absolutely correct: Howard/Costello introduced GST (a tax that hits poorest people the hardest) while cutting taxes for top-earners, privatized Telstra and other public assets, and introduced the CGT discount, precipitating the housing crisis and associated wealth inequality that plagues us to this day, as Australia increasingly becomes a nation of haves and have-nots.
But notice that both sides uncritically accept the assumption that government surpluses are desirable, and that government debt is a problem, in and of itself. For anyone concerned with their standard of living, the environment, or the trajectory of our society more broadly, this should be extremely concerning. Because, as we’ll see below, it means that almost of our decision-makers and “experts” are operating with an entirely backwards understanding of the economy.
Figures 1 and 2 below show the one-sided view presented to us by our politicians and media. Figure 1 shows the decade of government surpluses under Howard/Costello. From historically being in deficit in the preceding decades, under Costello, the government’s financial position moved sharply into surplus: the government was deleting more money through taxation, than it was injecting into the economy by spending.
Figure 1
Meanwhile, Figure 2 shows the impact of these spending flows on the stock of government (net) debt. Without fiscal deficits, the government does not issue new treasury securities (i.e., new “debt”), and existing debt on issue is retired (i.e., “paid off”).
Figure 2
Looks good so far, right? The thing we call the “budget” is in the positive, and the thing we call “debt” is down to zero.
But in reality, the “government surplus good; government debt bad” narrative is a complete inversion of reality; a patent falsehood that we’ve all just accepted as truth, to our great detriment.
Figure 3 shows the other side of the equation – the side you don’t see in the mainstream commentary.
Figure 3
The blue line shows the same data as Figure 2: the government’s budget each year. The red line shows the corresponding budget position for Australian households. The ‘net lending (+) / net borrowing (-)’ description at the bottom is just the financial jargon for whether a sector is accumulating or depleting its financial assets, overall. When it’s above zero, Australian households are in surplus: either increasing their savings, or paying down their debt. When it’s negative, households are in deficit: running down their savings, or taking on more debt.
What do we notice? The government’s surplus corresponds to a deep deficit for Australian households. The image is striking. And yet, if we think about it for a moment, it shouldn’t be surprising. What is a government surplus? It’s when the government hoovers-up more money out of the non-government sector (i.e. through taxation), than it injects through spending.
So, what we call a “government deficit”, is equally and precisely, a “non-government sector surplus” (Figure 4). And who is the non-government sector? Us! (i.e., households, businesses, etc.). Indeed, this is the golden rule of macroeconomics: one person’s spending is another person’s income. (Bizarrely, something our finance ministers and mainstream economists seem to have forgotten).
Figure 4
All we ever hear about from politicians and journalists is the top part of the image. We hear on the news that the government has “achieved” a budget surplus, and we’re all supposed to celebrate. But we’d feel differently if they said, “the government has achieved a private sector deficit – reducing the net financial assets held by Aussie households and businesses”. What they don’t tell you, is that these are literally the same thing!
This is not a theory. It’s an accounting identity. The picture is even clearer if we divide the entire economy up into three sectors. Looking at the financial balance of each sector, we can perceive how one sector’s net spending impacts another’s. Figure 5 divides the global economy into three constituent “sectors”: the Australian government, the Australian domestic private sector, and the rest of the world (i.e., the “foreign sector”).
Figure 5
Since all spending must come from somewhere and go somewhere, it is not possible for all three sectors to be in surplus, or in deficit at the same time. That is, in any given period, the financial balances of each sector must sum to zero (Figure 6).
Figure 6
Figure 7 shows the financial balances each of the three sectors for the years 1991 to 2007, with the pink bracket demarcating the Howard/Costello era.
Figure 7
What can we observe from the data?
- The black bars are the ‘foreign sector’ balance. This simply shows that, since Australia tends to run external deficits (think of this as a trade deficit), there is a net outflow of financial assets from Australia to the rest of the world. For the foreign sector (i.e., the rest of the world) this is a net inflow, i.e., the foreign sector is in surplus, vis-à-vis Australia.
- With the foreign sector in surplus, the only way for the Australian private sector to be in surplus is if the government runs a deficit.
- We can see that from 1991-1994, government deficits were roughly equal to the foreign sector surplus, meaning the Australian private sector was able sustain surpluses or small deficits during this time.
- And we can see what happens in the Howard/Costello years from 1996-2007: the government starts running surpluses, meaning – given the foreign sector surpluses – the Australia private sector is pushed rapidly into deep deficits.
So, for over a decade, the net financial assets of Australian households and businesses were being depleted, with dollars being sucked out of the private sector by the Australian government, foreign companies, etc. And yet, despite all this, Australia recorded consistently strong GDP growth this entire period (Figure 8).
Figure 8
This begs the question: how was this possible? How did Australia maintain its spending and avoid a recession, during a decade where the entire domestic private sector was being pushed into deficit (i.e., seeing its net financial assets be depleted) year after year?
In the long term, there is only one possible way for it do so: by going into debt. Private debt – which, as we’ll see below, actually is a problem, unlike the public debt bogeyman we hear about endlessly in the media. In Figure 9, we can see the tragic irony of Costello’s “Debt-free Day”.
Figure 9
The private sector could only maintain its spending and income over this period by going deeper and deeper into debt itself. Which, of course, is unsustainable and destructive for a variety of reasons. Not least of which, it worsens inequality and siphons wealth from the poor to the rich, as an increasing proportions of Aussie workers’ and businesses’ income is siphoned to big banks and 1% (who are the majority shareholders) as debt service.
Figure 10 shows the Debt Service Ratio – the interest and amortization payments made by Aussie households and businesses, as a proportion of their income.
Figure 10
The data was only available from 1999, but we can see it increases by almost 50% during the remaining Howard/Costello years, from about 16% to 24%. Worse still, the borrowing has been mostly for property investments (as opposed to borrowing to finance productive investments). As we know, the main beneficiaries have been the rich, who have the capacity to accumulate properties and benefit from the capital gains.
And we have been dealing with the legacy of these policies in the decades since: wealth inequality widens, the youth are barred from home ownership (or otherwise condemned to a lifetime of debt bondage to the banks), while the 1% gets richer. Meanwhile, the “mum and pop” investors who only own one property, see their own fortunes tied to the maintenance of those inflated house prices.
This is the legacy of Howard/Costello: the tax burden shifted from the rich to the poor, and the Australian economy transformed into a casino, predicated on a housing bubble, enriching the 1% at the expense of everyone else. And today, that same 1% are now exploiting the crisis to turn the blame on immigrants, the Left, etc., driving the gullible and desperate amongst us into the arms of the right-wing grifters.
A Sky News article from April this year reported Costello’s reflections on his “achievement” of reducing public debt:
‘Mr Costello, who served in the Howard government, said the public debt of nearly $1 trillion has left young Australians in a “significantly worse” financial position…
…he had hoped the reduction in debt would be a “gift” to future generations, including the establishment of the Future Fund.’
Go back and look at Figures 3 and 9 as you consider Costello’s statement. Does Figure 3 look like Aussie households are in a “better financial position”? Does the enormous increase in private debt (and associated housing bubble) look like a “gift to future generations”?
Better still, consider Figure 11, below. As with Figure 3, it shows the government budgets vs that of Australian households, but extends the analysis into 2015.
Figure 11
Source: Australian Government Treasury (2026); Australian Bureau of Statistics, author’s illustration
Note what happens after 2007. With the Rudd government taking office on the eve of the Global Financial Crisis, the government’s budget moves sharply into deficit. That is, the government is injecting more dollars into the non-government sector, than it is deleting through taxation. Australian households are a significant part of the non-government sector, and as we can see, their financial position improves over this period.
It is important to mention here that this analysis does not speak to the distribution of those financial assets, nor does it imply that households are “getting rich” over this period. Some wealthy households might have been accumulating savings. But for most, the surpluses probably reflect deleveraging – paying down their mortgages, credit cards, etc. And of course, for any individual household this could have been a period of deficit, bankruptcy, etc. – remembering that the data are for the household sector, overall.
But the key point of the graph is that Costello’s claims are completely backwards. Not just false. Not “out of context”, or “lacking nuance”. But a literal inversion of reality. It was his surpluses that eroded the financial position of Aussie households and businesses, making low- and middle-income Aussies poorer and condemning many to a lifetime of indebtedness to the banks. Conversely, government deficits are what enable Aussie households and businesses to net save, to accumulate financial assets and strengthen their own balance sheets.
The government’s deficits are our surpluses. Dollar for dollar. And equally, the “government debt” can be thought of as the “non-government sector’s (i.e., the people’s) savings” (e.g., the treasury securities held by your superannuation fund). This is something we will look at in closer detail in a future post. But for now, it should be clear that what we hear from finance ministers, mainstream economists, and the various “experts” and commentators is precisely the opposite of the truth.
For must of us, this understanding should be enough to bring us around – to see that government deficits are (most of the time) beneficial and necessary. Whether it’s your own household, your neighbour, or your local pub owner – all of us in the non-government sector are running around trying to accumulate Australian dollars, to increase our net financial assets, over time. Government deficits are the source of the those dollars we’re all looking to accumulate.
However, some may still wonder: “Okay, fine. That makes sense. One sector’s deficit is another sector’s surplus. So someone needs to be in deficit. But why should that be the government? If the government runs surpluses, sure it takes away money from you and I, but doesn’t it give the government savings so they can spend more on stuff later?”
The answer is no. As the issuer of the currency, the Australian government is the source of its own spending money – and ultimately, the source of spending money for the rest of us, too. If you think about it for a moment, the idea that the Australian government needs to save Australian dollars before it can spend – or that it even can save them, in any meaningful sense – is frankly absurd.
But it’s a very important question. Because it forces us to confront and debunk the poisonous lie that underpins the whole “government surplus good; government deficit bad” narrative that we hear in the media. That lie is the “Household Budget Myth”: the idea that the federal government is like a household, needing to generate revenue (or otherwise borrow) before it can spend. But of course, as summarized in Figure 12, below, the Australian government’s budget is nothing like that of a household.
Sure, as currency users, you and I need to generate an income before we can spend. But our government is the issuer of the currency! It needs to spend Australian dollars into the economy before it can remove any through taxation or bond issuance. As economist Professor Steven Hail puts it: “every dollar the government spends is a new dollar; every dollar it collects in taxes is a dollar destroyed.”
Figure 12
Author’s illustration
The only reason that you, me or Gina Rinehart have any “tax dollars” to fork over in the first place is because our government, via its wholly owned central bank (the RBA), has created and spent those dollars into the economy at some point in the past.
Taxation has many useful purposes, from discouraging harmful activity like smoking, reducing inequality, and helping to avoid inflation. And government bonds serve important functions in our financial system. But among the many valid reasons for taxation and issuing government debt, “funding” our currency-issuing government simply is not one of them.
This adds another layer of tragic irony to the story. It’s not just that the pursuit of government surpluses impoverishes Aussie households, businesses and the economy at large. But that we get precisely nothing in return for it. The government cannot “save” its own currency, in any meaningful sense. This is crucial. It means that the government’s lack of spending today has no bearing on its financial capacity to spend tomorrow. So, there’s no trade-off when the government tries to “save”, just waste. Just forgone investment today that we can never get back: consigning us to a future that is less wealthy, less resourced, less prepared than we could have been if we weren’t tying our own hands with imaginary financial constraints.
“Financial” capacity is emphasized here, because this is the key point to grasp. The issue with the “Household Budget” myth is that it imposes imaginary, arbitrary financial constraints on public spending, by falsely equating the federal government’s budget with that of a household. The reality is that, for a currency-issuing government (that spends, taxes and issues debt in its own currency), “finding the money” is never an issue. But of course, this is not to say there are no limits to what the government can spend and do. The true limit is real resource constraints – i.e., are there the materials, labour and bio-capacity available? For example, if you want to spend on building wind turbines, are there the metal ores, the skilled trades and technology for refining, processing, etc.? And, perhaps most importantly, is there the available bio-capacity – i.e., does the planet have the regenerative capacity to absorb the associated waste, pollution, etc. without destabilizing the Earth System on which our species depends? If the government spends big on highly demanded tradespeople, scarce materials, etc. without first freeing-up those resources (e.g., through taxation), we risk inflation. If it spends big on carbon/energy/resource-intensive projects beyond what the Earth System can sustain, we risk destroying the ecosystems that sustain us.
These are the real constraints on government spending. Not whether governments (who issue currency using computer keyboards) can “get money” to do it. As the great economist John Maynard Keynes put it, “Anything we can actually do, we can afford”.
This is the great tragedy of politicians saying we need surpluses so the government can “save money” to afford the things we need in the future. The irony is that, precisely by running surpluses and trying to “save” in the present, the government deprives us of the real investments in productive capacity that we actually need to provide these things in the future.
The perfect example of this lunacy is the “Future Fund”, one of Costello’s “gifts” to future generations. Sometimes referred to as Australia’s “sovereign wealth fund”, the Future Fund was set up by Howard/Costello in 2006. The government’s “savings” from their budget surpluses – and particular from the sale of Telstra – were allocated to the Fund, which invested in stocks and other financial assets. The purpose was to fund Australia’s “unfunded superannuation liabilities” in the future, when a larger proportion of Australian’s are retired and thereby entitled to government payments.
This has to do with the “aging population problem”, which you’ve probably heard politicians or economists mention. In developed countries like Australia, the demographics are changing such that, in the future, the dependency ratio (the number of aged – i.e., not working people – compared to the working-age population) is expected to rise. With less workers and more pensions, this means we expect lower tax revenue and more government spending on entitlements.
In the backwards mainstream view where the government is falsely equated with a household, the aging population is invariably framed as a “ticking time bomb”, where the government is going to have all these “unfunded liabilities” that it lacks the tax revenue to “pay for”. Of course, if you’ve been following the arguments laid out here, it should be clear that this is complete nonsense. The Australian government has unlimited financial capacity to make any and all payments denominated in Australian dollars.
So let’s think about this. In what circumstances would an aging population be a problem? It becomes a problem if, in the future, there is lack of real resources, services, infrastructure, etc. to provide for a society with a high proportion of aged people and retirees. We know the government can provide payments for any number of retirees. And we all want to be financially comfortable in retirement. But that’s a surface-level consideration. We want money because we live in a capitalist society wherein access to goods, services, need satisfiers, etc. is commodifed, and thereby mediated by income. Peeling back this layer, what is it that we actually want in our retirement? We want the real resources and services needed to live a comfortable life. We want access to high quality healthcare and aged care; to nutritious food, quality housing, clean air and pristine natural spaces, etc.
And as a society, how do you make sure you can provide these things for a large number of people in the future? You invest now, in the present, to build out the real productive capacity needed to provide those things. You train more nurses, doctors, engineers. You build high quality public hospitals, aged care facilities and housing. You invest in local production of medicine, nutritious food, renewable energy, etc.
Now, with this in mind, cast yourself back to 2006 and put yourself in Costello’s shoes, as a treasurer looking to prepare Australia for an aging population. If you were smart, you’d make those investments, right? You’d use the government’s unique power as currency issuer, to spend now on mobilizing and producing the real resources needed to provide for the future. But instead, Costello did the opposite. “Responsible economic manager” and pragmatic super genius that he is, he decided to “save” Australian dollars – despite the Australian government being literally the one entity in the world that has absolutely no need to do so!
There could scarcely be a better example of tragic irony (nor just plain stupidity). By “saving” to “fund the future”, Costello robbed Australians of precisely the investments need to actually provide for their future. You couldn’t make this stuff up.
20 years on, this is still completely lost on Australia’s decision-makers, with both Liberal and Labor politicians touting their destructive policies as superior “economic credentials”. Earlier this year, the Liberals were mourning the Costello surpluses. While last year, Labor was bragging that Chalmers had “delivered” a budget surplus in 2024. It’s absurd how they can be so arrogant and so utterly wrong at the same time. Though in the age of Trump, this should not surprise us.
It would be funny if it were not so sad and infuriating. Because, if we keep on this path, we’ll arrive at a future that’s completely under-resourced and ill-equipped. Having “saved money” instead of investing in the future, all the government will be able to offer us is some digital entries on a computer screen called dollars, but none of the real resources that we actually want to buy with them.
If we continue to let these idiots lead us, cheering whenever they “deliver” a surplus, we can glimpse the grim future that awaits us. We’ll arrive at old age and ask: “Alright, it’s the future. Many of us are old and retired now. Where are all the high-quality aged care facilities? The hospitals? The clean energy and pristine natural spaces?”
And none of those things will be anywhere to be found. We’ll find ourselves on a degraded planet, with crumbling infrastructure, low-quality and limited public services, hospitals, etc.
And when we ask the government what the hell happened, they’ll say: “Don’t worry! We saved up a ton of money! Yes, we let mining companies destroy the forests and pollute the air and the water. And sure, we didn’t build enough hospitals, aged-care facilities, wind turbines; didn’t train enough nurses, teachers, skilled tradespeople and engineers. But look! We’ve got all these Australian dollars! You know?! Those digital entries on a spreadsheet at the RBA? Those blips on a screen that we type into existence on keyboard? Which we have unlimited amount of? Yeah, dollars! We’ve got heaps of them!”
“We’re rich!” They’ll insist, as the ocean swallows another coastal city, and as the overcrowded, under-staffed hospitals swell with patients, one “unprecedented” weather event after the next.
That’s the future that awaits us if Australian’s don’t wise-up to this nonsensical economic pseudoscience.
Of course, it doesn’t have to be this way. We can have a better future, if we aren’t too foolish to invest in it now. But that starts with taking the red pill; with leaving the “household budget” myth behind us; with understanding that money is not a scarce resource our government needs to “get”, but rather, a public utility; a tool we can use to organize society and shape the future we want.