How does $6 billion equal $16 billion? > Check the facts

Who:  “The budget impact of the Coalition’s policies is to improve the budget bottom line by $6 billion and reduce government debt by $16 billion.” Joint media release from Shadow Treasurer Joe Hockey and Shadow Minister for Finance, Deregulation and Debt Reduction, Andrew Robb.

The claim: That Coalition policies will reduce the deficit over the forward estimates by $6 billion and reduce debt by $16 billion.

The facts:  The policy costings show a deficit reduction of $6 billion that will result in a debt reduction of $16 billion. Normal accounting should show that for any entity a deficit change of $6 billion will produce a debt change of $6 billion by the end of the accounting period.

Footnote 9 to the full costings explains the discrepancy by showing that the Coalition intends to reduce equity injections into the Clean Energy Finance Corporation (CEFC) and the NBN Co by $10 billion.

The finding:  The Coalition claims are misleading because the Commonwealth’s net financial position (assets minus liabilities) would be unchanged as a result of reducing equity injections into the CEFC and NBN Co.

Discussion of evidence:  Suppose BHP Billiton planned to inject more capital into a subsidiary company and to pay for it by incurring more debt. Although this would increase the value of the subsidiary it would also increase BHP’s debt, however, BHP’s net financial position would remain the same. If it now decided not to go ahead it would expect to improve its debt position but its net financial worth would remain unchanged. By contrast if BHP developed a more cost effective way of mining iron ore that would directly improve its bottom line and add to shareholder net worth.

Normally government spending and taxation would have an impact on the budget balance and hence the government debt. Transactions that do not affect the budget balance but change the composition of the Commonwealth’s financial net worth are referred to as ‘below the line transactions’. Below the line transactions do not have any impact on the financial net worth of the Commonwealth however they do change the composition of the financial assets and liabilities.

When the Howard government sold Telstra the receipts were large enough to give a misleading impression of the true picture and so the budget papers showed the ‘underlying budget balance’ which adjusted for asset sales as well as the so-called ‘headline balance’. It is the underlying balance that affects the net worth of the Commonwealth. Hence it is misleading to claim a $16 billion reduction in government debt without making it clear that $10 billion of the reduction is artificial to the extent that it merely reflects a change in the composition of the net financial position.