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  • You're going to witness a title bout

  • between two of Australia's heavyweight economists.

  • I think if you tried to find two economists in Australia

  • who agreed less with each other,

  • you'd have a hard time finding anyone else to fill this stage -

  • and I'm sure they looked far and wide.

  • Our two speakers today have exchanged barbs in the blogosphere.

  • They've penned columns criticising one another.

  • And they faced off on 'Lateline' earlier this year.

  • and they're now in the room, we have confirmed, for the first time,

  • speaking face-to-face for the first time.

  • (LAUGHTER)

  • I'm going to stand in the middle if it gets too heated.

  • So we have, of course, here today -

  • and I'm about to introduce them in turn -

  • Professor Judith Sloan, and Stephen Koukoulas, who I'll get to.

  • First of all, Judith Sloan is one of Australia's best-known economists.

  • She's a leading figure in academic and business circles

  • with extensive experience in both the public and private sectors.

  • She's currently an honorary professorial fellow

  • at the Melbourne Institute of Applied Economic and Social Research

  • at the University of Melbourne.

  • She's also a member of the Westfield board,

  • a director of the Lowy Institute for International Policy,

  • and the contributing economics editor of the 'Australian' newspaper.

  • And although it's an accolade you might not think much of, Judith,

  • you are actually the first

  • female 'Australian' economics editor that we've had.

  • There was somebody else who was hoping for that title,

  • but you got there first - well done.

  • On 'Lateline' earlier this year, Judith said that

  • Australians are right to be nervous about public debt,

  • that the Labor Government wasted too much money,

  • and in fact a recession could have been quite useful in Australia.

  • Some dangerous ideas there.

  • We're going to stand by those and explore them in a bit.

  • Before we get to that, I'm going to introduce Stephen as well.

  • Stephen Koukoulas is the managing director of Market Economics,

  • which is a firm he established in January 2012.

  • He's been a working economist for more than 25 years.

  • That's a quarter of a century in journalist speak.

  • He started his career as an economist at the Commonwealth treasury

  • in the mid 1980s.

  • And most recently he worked his way all the way up to the top

  • and was a senior economic advisor to Prime Minister Julia Gillard.

  • Before that, he was the global head of economic research and strategy

  • for TD Securities, and he also spent five years working at Citibank.

  • It is timely for us to come together and talk about this topic today.

  • We're fresh from a rather gruelling federal election

  • which was fought, as elections often are,

  • on the issue of economic management

  • and whether we need to reduce waste and debt,

  • with the Australian electorate seeming to have produced a verdict

  • which said that, yes, we do need to be worried about debt.

  • The world economy is also still experiencing a bruising recovery

  • from a global financial crisis,

  • which arguably, was caused by too much debt, both private and public.

  • If it wasn't so much the public debt that was the problem to begin with,

  • it has been the lasting legacy of the GFC,

  • with public debt in Europe and the United States

  • keeps threatening to tip us back over the brink and back into crisis again.

  • So we come together today to discuss,

  • can we really afford to forget about debt?

  • And hopefully you'll know in about 57 minutes.

  • (LAUGHTER)

  • Just some administrative things before we start.

  • I'm going to ask the speakers to come to the podium

  • and do a sort of 10-minute kick-off rally speech

  • for their points of view,

  • which will be followed by some general fisticuffs,

  • as I've defined it in my mind,

  • between us all on stage.

  • Then we've set aside 10 minutes at the end

  • for you guys to ask some questions.

  • If you want to ask a question, just pop up to one of these microphones

  • that we've got there and there

  • and wave at me and catch my attention,

  • and I will turn to you.

  • Also, everybody, turn off your phones and turn on your brains.

  • It's time to start.

  • Can you join me in welcoming Professor Judith Sloan to the podium?

  • Thanks very much, Jess.

  • When I was invited to speak here, so, the Festival of Dangerous Ideas,

  • I was wondering, is it dangerous for me to attend?

  • I think it probably is a bit.

  • I am assuming I don't have many fans here,

  • but I come to the conclusion

  • that it is important to be involved in the discussion,

  • to put points of view that perhaps people

  • might not initially feel very favourable towards.

  • And even though I think I do disagree with Stephen in some ways,

  • I think we are very civil towards each other.

  • STEPHEN: Always.

  • Well, no, I'm trying to make an important point here,

  • because I think that if you look at the economic policy discourse

  • in the United States, for example, that is not what you'd call civil.

  • It's rude, it's personal, it's playing the man/woman.

  • And I don't think we ever want to get to that point.

  • And I guess Stephen agrees with me on that.

  • (APPLAUSE)

  • STEPHEN: Yes, I do.

  • I'm not saying I love him, by the way.

  • (LAUGHTER)

  • What I thought I'd do is just take a few minutes,

  • because I actually think, and I hope you all agree,

  • that if you have a debate,

  • it's always quite useful to have a kind of common set of facts.

  • If there's a certain sort of PowerPoint presentation

  • which you can basically agree with,

  • and then we can kind of debate where we should go in terms of policy.

  • I also think it might be quite important,

  • even though I am an economist who tends to specialise -

  • and I guess Stephen is too - in Australian economic policy,

  • that we shouldn't think of this just in an Australian context.

  • It's a very important worldwide context

  • both for developed economies and for developing economies.

  • So hopefully in the discussion, Jess, and in the questions,

  • we can broaden it out.

  • I guess when I saw the title 'Forget Debt',

  • I was going to say "Forget Debt: As If".

  • (A FEW CHUCKLES)

  • What is debt?

  • Debt, basically, is retimed spending.

  • It's spending undertaken now rather than in the future.

  • We should not forget,

  • and we can think of this in a personal way as well,

  • that debt must be repaid.

  • So if we think, then, about government debt,

  • government debt is effectively a liability on future taxpayers.

  • Of course, those future taxpayers, by and large,

  • are not voting for the current accumulation of debt.

  • So this may sound a weird thing for an economist to be saying,

  • but I think there is an important issue of morality,

  • because it is a sort of intergenerational transfer

  • that you build up in terms of accumulating current debt.

  • I'm hoping this is something that we don't deal with too much.

  • There are some technical issues about how we define government debt.

  • Is it face value or market value? Is it gross or net?

  • Now, where I'm coming at, Stephen,

  • is that really for most purposes,

  • you'd be thinking about net debt at face value.

  • So we don't...

  • And it'll put you to sleep -

  • you'll be going back to sleep, where you possibly want to be anyway.

  • (LAUGHTER)

  • So can I just put it in some sort of numbers, figures?

  • In Australia, when we think about net debt,

  • we're hovering a little under $200 billion.

  • We got about a $1.5 trillion, $1.6 trillion economy.

  • We're hovering around the 10% to 11% mark of GDP.

  • You might want to remember that figure.

  • I'm sure Stephen might want to emphasise that one,

  • because by international standards, that's a pretty low figure.

  • So it's about effectively 10% of our national income,

  • annual national income.

  • What's happened over time,

  • if we go back long enough, say like after the Second World War,

  • we had absolutely heaps of government debt as a result of the war effort.

  • If we think, though, in the late 1980s there was very little debt.

  • It then increased a lot in the last years of the Labor Government,

  • ending in its defeat in 1996.

  • John Howard was able to cut the debt considerably,

  • but he did have a lot of assets to sell, which he did sell.

  • He restricted spending for a while, but only for a while,

  • and in the end he basically secured a windfall tax gain

  • because of the early version of the minerals boom.

  • After that we've had what I regard as a massive increase.

  • Stephen mightn't, and I guess this is a point of difference.

  • We have got a gold medal -

  • or a wooden spoon, depending on your point of view -

  • in increase in government debt since 2008.

  • There has been a very, very significant increase in gross debt

  • under the Labor Government.

  • Now, of course, our newly elected treasurer

  • has increased the debt ceiling to $500 billion.

  • I think we should have a bit of a debate about that, Jess.

  • As I said, though, Australian government debt

  • is low by international standards.

  • But can I just get you to think about this?

  • That quite a lot of those countries which have very high debt

  • are complete basket cases.

  • They're the Greeces and the Portugals, Italy, Spain.

  • I mean, the UK and the US have very high government debt too,

  • and Japan, extremely high government debt.

  • So for at least some of them,

  • they are in a real pickle trying to adjust to their debt.

  • They're facing low growth and very difficult adjustments.

  • And there are quite a lot of important countries

  • that have lower net debt than Australia -

  • and I rattle them off - including basically all of Scandinavia,

  • Sweden, Finland, Norway, Denmark,

  • Chile, Singapore, Hong Kong and Estonia.

  • I think Stephen will agree with me on this point,

  • we have to think, when we think as an economist...

  • We mightn't just actually think about government debt,

  • we actually think about household debt.

  • Australia is very indebted in a household debt sense.

  • And secondly, we might think about our current account deficit,

  • which Australia runs chronically.

  • I'm just about to wind up, but it's worth, I think, thinking about

  • why do you have government debt?

  • This is, I think, where the arguments become kind of confused.

  • There is one reason why,

  • which is what you'd call a Keynesian reason for having debt.

  • So in the event of the economy growing below par

  • or in fact contracting and unemployment increasing,

  • the argument is that the government should increase spending

  • and that will involve deficit financing, which will involve debt.

  • So think of that - that's what you call the Keynesian argument.

  • There is another argument, though,

  • that you should use debt to finance long-living assets.

  • So you don't pay for your house using cash.

  • It's a long-living asset.

  • So you use a financial instrument,

  • which smooths the payments over the life of that asset.

  • That's, I think, a different argument.

  • Maybe that can be a central core of the debate.

  • And for my money,

  • as long as those assets clear

  • what I call a clear cost/benefit test -

  • so they're are clear net benefits to the community -

  • then there's probably no problem using debt

  • to finance those long-living assets.

  • I don't think Keynesian priming works,

  • but I'm not sure I'm totally opposed to raising debt

  • for the purposes of financing long-living assets.

  • Does that mean we forever should be increasing debt?

  • I don't think so.

  • We were talking about this in the green room,

  • which was green, by the way - I love that.

  • In the ABC, it's not really green,

  • it's some sort of hideous version of green.

  • But is debt like cigarettes where one is harmful to you

  • and 60 a day is definitely harmful to you?

  • Or is debt more like red wine?

  • Where one or two glasses a day really actually quite good for you...

  • 10 to 12 possibly not.

  • I think there is a nuance in this argument about...

  • My guess is it is more like red wine.

  • It's just how many glasses are actually safe.

  • So let me finish off by saying - can we forget debt?

  • It's like a good pipe dream, isn't it?

  • "Yeah, just forget it."

  • But no, Australia needs to defend its credit rating,

  • and I guess there's some issues about the credit rating agencies.

  • We could always use high inflation to reduce the real value of debt,

  • but that would actually impoverish us all,

  • so I don't think that's a good idea.

  • So my rule, basically, is that I want to have relatively low debt,

  • I want it raised <