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Fact Check

Katy Gallagher says the government has inherited the worst set of budget books in history. Is that correct?

katy gallagher is not speaking. verdict: WRONG with a red cross
Finance Minister Katy Gallagher says the incoming Labor government has inherited the worst set of budget books in history from the Coalition.(ABC News: Ian Cutmore)

The claim

As the Labor Party emerged victorious from the election, the new government quickly turned its attention to the state of the economy.

Six days after being sworn in as Minister for Finance, Katy Gallagher told ABC TV's Insiders: "We have inherited the worst set of budget books".

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Watch David Speers interview Senator Gallagher on Insiders

Does Senator Gallagher's claim stack up? RMIT ABC Fact Check investigates.

The verdict

Senator Gallagher's claim is wrong.

On two key economic indicators, debt and deficit, previous incoming governments have inherited worse "budget books".

The only fair way to make historical comparisons is to take into account the size of the economy and measure the indicators as a proportion of GDP.

On this basis, gross debt levels were historically much higher for previous incoming administrations than the figure faced by the new Labor government.

Similarly, the deficit as a percentage of GDP is not the worst on record.

A pile of Australian dollar coins on top of several bank notes
Other incoming governments have inherited higher levels of debt and deficit from their predecessors.(AAP: Joel Carrett)

The claim in context

Senator Gallagher made similar claims during the election campaign which provide additional context.

Responding to a question on RN Drive on April 12 about why the Labor Party had ruled out reviewing the JobSeeker rate she said: "We are going to inherit the worst set of budget books that any incoming government would have ever inherited."

"We can't undo all the damage that has been done under this government and we do have to accept that we have a budget with significant deficit and lots of debt that we have to manage going forward if we were fortunate enough to be elected."

Two days later, she told RN Breakfast that if Labor won the election it would face "the most diabolical set of budget books that any opposition trying to form government would inherit".

On this basis, Fact Check has assessed her claim on the key economic indicators of debt and deficit and has compared the latest figures with the legacies left to incoming governments since federation in 1901.

A familiar complaint

Senator Gallagher isn't alone in asserting her predecessors bequeathed an unenviable record.

In 2015 Fact Check assessed a claim by then Liberal deputy leader Julie Bishop that the Coalition had been left with the "worst set of financial accounts inherited by any incoming government in Australia's history".

Fact Check found that claim to be wrong.

At the time, economists told Fact Check the best way to compare historical financial records was to take into account the size of the economy: in other words, analyse debt and deficit (or in good times assets and surpluses) as a proportion of GDP.

David Richardson, a senior research fellow at the Australia Institute, previously told Fact Check that "looking at the figures without looking at gross domestic product tells you nothing".

"If you go back 40 years, everything you want to measure is going to be roughly 30 times bigger now than it was then," he said.

The economists also noted that it was best to use figures for net debt (as opposed to gross debt) where possible, as it allowed for "debt-related assets" of the government to be offset against borrowings.

When comparing the state of the budget books passed from one government to the next, the time of year when the handover occurred is also relevant.

For example, Robert Menzies in 1949, Gough Whitlam in 1972 and Kevin Rudd in 2007 all came to office in December, whereas Anthony Albanese was sworn in in May.

However, much of the available data is only for the end of financial years. To compare budget figures consistently, Fact Check has relied on the end of the last full financial year before a change of government.

What data is available?

Figures for net debt, gross debt and budget deficits as a proportion of GDP are published in the budget papers for financial years dating back to 1970-71.

However, locating publicly available data going back to federation in 1901 is more challenging.

Treasury previously provided Fact Check with figures on gross debt, with historical numbers sourced from a 2009 Treasury paper on the history of public debt in Australia.

While economists view net debt figures more favourably than gross debt, as outlined above, Fact Check has assessed Senator Gallagher's claim using the data provided by Treasury, as it is the best available.

As for budget surpluses and deficits, a Treasury spokeswoman said the department did not have a "complete verified data series" dating back to federation.

Fact Check has been unable to locate any official data on budget balances covering the period from federation to 1970-71.

As such, when it comes to historical deficit levels this fact check relies primarily on a 2013 research paper written by economist Ashley Owen and commissioned by financial advisory firm Centric Wealth, as well as expert opinion.

Comparing debt levels

When Mr Albanese won office, the debt-to-GDP ratio at the end of the last full financial year, 2020-21, stood at 39.5 per cent.

In terms of incoming governments in modern times, the latest figure outstrips the 21.3 per cent inherited by John Howard when his Coalition government took over from Labor under Paul Keating in 1996 and the 25.8 per cent left to Labor's Gough Whitlam by the Coalition's William McMahon in 1972.

However, several new governments faced a significantly higher debt to GDP ratio in earlier years.

The Treasury data shows that the 2020-21 figure is the highest since 1954-55, in the aftermath of heavy borrowings to finance Australia's participation in World War II. Debt peaked at 125.1 per cent of GDP in 1945-46.

Due to a break in Treasury's historical data series, an entirely consistent comparison cannot be made. But gross debt levels were much higher than at present for other incoming administrations.

When Mr Menzies led the Coalition to victory over Labor in 1949, gross debt was 85.3 per cent of GDP, more than double that faced by Mr Albanese.

When Joseph Lyons led the United Australia Party from opposition to form a depression-era government in 1931, debt as a proportion of GDP was 61 per cent.

Higher debt levels were also inherited by incoming Labor leaders James Scullin (43.7 per cent) in 1929 and John Curtin (42.8 per cent) in 1941.

Comparing deficit levels

When it comes to the budget balance, the most recent budget papers show the deficit at the end of 2020-21 was 6.5 per cent of GDP.

This is the highest figure in the historical section of the latest budget papers dating back to 1970-71.

Two other incoming governments inherited deficits in this period, but both were smaller: 2.9 per cent of GDP for Mr Howard in 1996; and 1.2 per cent of GDP for Tony Abbott in 2013.

However, Simon Ville, an economic historian and professor at the University of Wollongong, previously told Fact Check that the budget deficit "of course rose pretty quickly in 2020-21, but not as high as in wartime".

Graphs in Mr Owens's 2013 research paper show that the budget deficit reached more than 10 per cent of GDP during World War I and more than 20 per cent of GDP during World War II.

A bar chart showing budget deficits and surpluses between 1901 and 2014
Deficits recorded during WWI and WWII were much larger than the most recent ones recorded.(Ashley Owen, Philo Capital Advisers)

As for incoming governments, Mr Curtin's Labor administration inherited a deficit of around 10 per cent of GDP in World War II.

Jeff Borland, a professor of economics at the University of Melbourne, told Fact Check that when assessing debt and deficit data, it was important to take into account the economic circumstances a government had to contend with.

"Just as it didn't make sense to criticise the Rudd and Gillard governments for having increased spending during the GFC, so it doesn't make sense to criticise the current government just because they increased spending with the onset of COVID-19," Professor Borland said in an email.

"Instead, I think analysis of the performance of the governments has to be about whether they increased spending by the right amount and whether the increased spending contributed effectively to Australia's economic performance."

Budget estimates for the current financial year

As noted above, Fact Check has assessed Senator Gallagher's claim of the "worst" set of budget books on the basis of the last financial year prior to a change of government.

This ensures consistency over time and allows for the claim to be assessed on the basis of budget "actual" figures (for those periods already passed) as opposed to "estimates" about the future.

For the sake of completeness, Fact Check has also considered estimates in the most recent budget papers for the current financial year ending on June 30.

The budget papers forecast that debt as a proportion of GDP in 2021-22 would remain steady at 39.5 per cent.

Meanwhile, the deficit is expected to drop from 6.5 per cent of GDP in 2020-21 to 3.5 per cent by June 30. That is a level significantly lower than experienced in either world war.

Principal researcher: Sonam Thomas