It's sort of tangential to the main point of the article but there's a very important point to be made about deficits and debt from the data here.


In 1945, Australia's national debt was around 120% of GDP.

For the next 30 years, we ran continuous budget deficits for the whole period.

At the end of the period our national was 20% of GDP.

That sounds illogical but there's a very simple explanation: the debt was growing more slowly than the economy. Also, the real value of the existing debt was reducing due to inflation.

A really extreme example of that last point: Germany borrowed heavily during World War I, mostly from domestic lenders. After the war, Germany experienced hyperinflation. So someone who had invested their life savings - say 100,000 Reichsmarks - would receive a letter with a cheque for the amount owed. Only catch was the stamp on the letter would have cost 1,000,000 Reichsmarks. That's how Germany paid off its war debt.

To take a way less extreme example: the interest rate on Australian government bonds has just been raised from 0.5% to 0.85%. But inflation is running at around 5%. So if an investor bought a $1,000,000 government bond a year ago, it's now worth $100.50. But in real terms, that $100.50 has the same purchasing power as $95.48 a year ago. But higher inflation means higher sales tax revenue and higher income tax revenue - at least in nominal terms. Currently wages in Australia are growing at around 2% in nominal terms. That means they're falling in real terms after you take inflation into account but those additional nominal dollars still get taxed.

Basically, if deficits are growing more slowly than the sum of inflation and GDP growth and interest rates and the exchange rate are reasonably stable, a government can run deficits indefinitely while still reducing the debt to GDP ratio.

https://www.abc.net.au/news/2022-06-07/fact-check-katy-gallagher-worst-set-of-books-debt-deficit/101129490

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