Comment: Feds plan to obliterate bond market

Ian Rogers
The risks and consequences of a severe finance sector mishap forms part of the backdrop to the 2015 Intergenerational Report, but not a bold one.

Ireland's experience during the Global Financial Crisis, which saw gross debt reach 124 per cent of GDP in 2013, "is a warning of how rapidly government balance sheets can deteriorate in the face of large economic shocks," Treasury observe in the five yearly report.

Another GFC factor is a weak tax take.

"Tax receipts are projected to continue to recover following the Global Financial Crisis," Treasury note, without considering the import of the tepid revival of business taxes over recent years.

"Under current policy settings, the tax-to-GDP ratio would reach the long-term assumption of 23.9 per cent of GDP in 2020-21.

"This is expected to be largely driven by 'bracket creep', which occurs when rises in nominal income from employment and investments push people into higher income tax brackets over time.

"Bracket creep will entail an increase in the personal income tax burden. Beyond 2020-21, projections of tax receipts are assumed to remain capped at a constant 23.9 per cent of GDP."

The Australian government bond market is projected to dissipate over the next two decades.

"If the 'proposed policy' scenario were to eventuate, net debt would decline from 15.2 per cent of GDP in 2014-15 to be zero by 2031-32, after which the Australian Government is projected to begin accumulating assets utilising underlying cash surpluses," Treasury speculate.

With no government bonds to absorb the banks' liquidity - as the new rules require - this time of plenty will be a test of innovation, not the least for prudential regulators.
 
As time has proved, setting free the 'animal spirits' of the financial sector invites catastrophe and crisis. History has also shown no-one learns from it.
 
Who among the next generation of regulators will recall that the last time a federal treasurer tried to close down the bond market was back at the turn of this century, when Peter Costello was on deck? He was persuaded to leave a token government bond market in place, and it was his reluctant backdown that proved vital to the stability of Australia's financial sector more than a decade later.

If a week is a long time in politics, what price a decade?