Why the Government Loves Red Ink—and Your Rising Home Value

Acknowledgement

We come from bricks and mortar, not economics. This post only came together thanks to Paul S., who patiently turned a spaghetti bowl of macro-economics into plain language, answered our questions and helped draft it.

Peter, Paul … and the Federal Budget

Grab two mates, 40 poker chips and a kitchen table. Give Peter 20 chips and Paul 20 chips, then slide 10 of Paul’s across to Peter. Peter flashes a smile—he’s “in surplus.” But notice the mirror image: Paul is instantly 10 chips “in deficit.” Australia’s public finances work the same way.

When Canberra booked a $15.8 billion surplus for 2023-24, it didn't magic up extra wealth. It swept that $15.8 billion out of households' and businesses' bank accounts. Treasury then forecast a swing back to a $28 billion deficit the following year, because if the government keeps pocketing chips, the rest of us eventually run out.

Economists call this see-saw the sectoral balance identity: the government's balance, the private sector's balance and the foreign sector's balance must always add to zero. Surpluses feel good, but they're Peter pinching Paul's chips, and Paul is every mortgage holder, student-debt payer and small business owner in the country.

Money 101: Every Dollar Is an IOU

Australia's first national banknote (10 shillings, 1913) declared: "The Treasurer … promises to pay the bearer in gold coin on demand." Today every plastic fiver is still the Reserve Bank's liability, an IOU we all accept because we trust the promise.

Most dollars never exist as paper. Roughly 80% of the money supply is created when a commercial bank approves a loan: the bank types a deposit into your account and books a matching loan. Repay the loan and those dollars vanish. As the Bank of England put it, "Loans create deposits." (Video explainer below.)

Government dollars work the same way, just bigger. Because every dollar is an IOU, total financial assets always equal total financial liabilities. A world where everyone "lives within their means" at the same time would have no money at all.

The Peter-Paul Principle: One Sector's Surplus Is Another's Deficit

What the identity says

Economist Wynne Godley set out the framework: add up the net saving of the government, the private sector and the rest of the world, and the total is zero. A government surplus (taxes more than spending) pushes the private sector into deficit unless the foreign sector offsets it. Peter can't gain ten chips without Paul losing ten.

Australia's numbers in action

• Howard/Costello era (1998-2007). Repeated federal surpluses coincided with an explosion in household debt. The debt-to-income ratio more than doubled.
• Mining and the current account. Record mining exports flipped the current account into surplus. To keep the identity balanced, either Canberra runs a deficit or the private sector does. There's no third option.
• The 2023-24 "back in black" moment. The $15.8 billion surplus rode on mining revenue, while household debt stayed near record highs.

Why everyone can't be in surplus at once

What is Modern Monetary Theory (MMT)?

MMT is a description of how a government that issues its own currency, like Australia's, already pays its bills. Canberra spends first by crediting bank accounts through the Reserve Bank, then taxes later to make room in the economy and keep prices steady.

Spending comes before taxing

When Treasury pays a supplier, the Reserve Bank credits the supplier's bank. That keystroke creates new Australian dollars. No pile of tax revenue is shuffled over first. The Bank of England described this "loans create deposits" mechanism in its 2014 bulletin (see the Richard Murphy video above).

MMT's catchphrase: a currency-issuing government "can never run out of money; it can only run out of things to buy."

Taxes are the brakes, not the fuel tank

Every deficit dollar spent adds money to the economy, so something has to mop up the excess or inflation takes off. Taxes do that job. Income tax, GST, fuel excise and, yes, stamp duty delete part of the money the government created. Taxes also give the dollar its value: you accept Aussie dollars because the ATO accepts nothing else.

Why issuing bonds isn't borrowing like a household

Canberra still auctions Treasury bonds, but not because it needs the cash. Bonds give super funds and banks a safe, interest-paying place to park money, and they help the financial system run smoothly.

Inflation guard-rails

MMT doesn't say "print forever". If spending outruns real resources (skilled labour, steel, timber), prices climb, and the government has to raise taxes or cut spending. Anyone who priced a frame during the post-COVID building boom saw how quickly capacity limits bite.

What follows for policy

• Full-employment spending: While builders or nurses sit idle, deficit spending can employ them without stoking inflation.
• Low-rate bias: Lower interest rates reduce the flow of interest from borrowers to lenders.
• Targeted credit controls: Regulators can rein in speculative lending, such as investor mortgages, instead of hiking rates on everyone.

Mining keeps pumping record profits and royalties into government coffers, yet Treasury swung from a $15.8 billion surplus in 2023-24 to a forecast $28.3 billion deficit in 2024-25. If Canberra doesn't recycle the resources windfall through spending, households already carrying some of the world's highest debt have to borrow even more to keep the economy moving.

Australia's Two-Speed Cash Flow: Mining Booms vs Budget Gaps

The mining money keeps gushing in

• In 2022-23 the mining sector paid $74 billion to federal, state and territory governments: $42.5 billion in company tax and a decade-high $31.5 billion in royalties.

The current account flips the maths

• Australia ran an $11.8 billion current account surplus in the December 2023 quarter. That foreign-sector surplus has to be offset by a government deficit or a private-sector deficit.

Why Canberra has to recycle the boom

• Treasury used the royalty tide to post back-to-back surpluses, including $15.8 billion (0.6% of GDP) in 2023-24, but the 2024-25 Budget projected a $28.3 billion deficit as resource prices eased.
• Perpetual surpluses would force households or businesses to take on equivalent debt. During the 1998-2007 Howard-Costello surplus run, household debt-to-income rose from roughly 70% to over 150%.

What happens if government doesn't spend the royalties?

• RBA research shows high debt amplifies downturns, because indebted households cut spending faster.
• If Canberra pockets the mining cash and chases a surplus, mortgage holders have to borrow more or sell assets, pushing the economy towards recession.

Housing: Australia's Favourite Piggy Bank

Australian households don't keep their wealth in cash or shares. They park it in bricks and mortar. Roughly two-thirds of household net worth (about $11 trillion of $16 trillion) sits in residential land and dwellings, according to the ABS's March 2024 finance and wealth accounts. Because that pile of equity is big and hard to move, governments treat it as a reliable tax base.

Why property dominates household balance sheets

• Super and property make up about 75% of net household wealth, leaving families asset-rich and cash-poor. Cheap credit, tax breaks and culture have funnelled savings into housing for 30 years.

The tax system is set up to harvest those gains

High prices help keep the red ink under control

• Every $1 trillion lift in dwelling values widens the stamp duty and CGT base by roughly $4-5 billion a year, based on Grattan Institute and Treasury figures.
• Rising valuations also prop up land tax, which several states are lifting faster than inflation.
• When prices sag, those revenues shrink, forcing bigger deficits or cuts. That gives policymakers a strong, if rarely stated, reason to keep the property market buoyant.

Negative gearing and the CGT discount: the turbo-chargers

• The two concessions cost the federal budget about $20 billion a year in forgone revenue, yet they're politically sticky because they inflate household wealth on paper.
• Academic modelling suggests scrapping the CGT discount alone could take 4-5% off capital-city prices: good for affordability, bad for Treasury's future CGT haul.

Why stamp duty refuses to die

• Economists call it Australia's worst tax, but states can't quit it. NSW collected $7.6 billion in 2022-23, its second-largest revenue source.
• A nationwide shift to broad land tax would add up to $17 billion to GDP, yet the politics of replacing such a dependable cash faucet remain brutal.

Why Canberra Quietly Prefers Deficits and High House Prices

The three-sector see-saw leaves the Commonwealth a choice: run modest deficits that put dollars into household accounts, or watch private debt and unemployment climb. Add a tax system that skims billions from every rise in property values, and it's clear why policymakers rarely gamble on lasting surpluses.

Deficits top up household cash

• The Budget papers showed the one-off $15.8 billion surplus in 2023-24 flipping to deficits of about $28 billion in 2024-25 and $43 billion the year after.
• With the current account in surplus thanks to mining exports, either Canberra or households must run a matching deficit. Government deficits are the gentler option.

High house prices quietly plug the revenue gap

• Stamp duty is one of the states' biggest own-source taxes (see the table above).
• Federally, the CGT discount and negative gearing cost about $20 billion a year but keep investor demand, and taxable capital gains, humming.
• States have started lifting land tax to make up for softer property turnover.

Rate cuts show the feedback loop in real time

• After the RBA's May 2025 cut to 3.85%, capital-city auction volumes jumped about 40% in a week and the preliminary clearance rate hit 71%.
• Higher turnover instantly lifts stamp duty, cushioning state budgets. It's a neat circular bonus for treasuries.

Milton Friedman: "Deficits Aren't the Villain, Overspending Is"

Milton Friedman, the Nobel-winning free-market economist, didn't lose much sleep over red ink. His worry was big government spending, however it's financed, because it eventually saps private productivity and freedom.

Spending is the real burden

• "A so-called deficit is a disguised and hidden form of taxation. The real burden on the public is what government spends," Friedman wrote in Bright Promises, Dismal Performance (1983).

Deficits as a political restraint

• Interviewed in the early 2000s, Friedman said that deficits “have their virtues, because they are the one thing that brings pressure on Congress to hold down spending.”
• He called this a "second-best solution", but better than quietly raising taxes to fund ever-larger programs.

Cut taxes first, force discipline later

• Friedman's rule of thumb: "Cut taxes anytime, in any way, in any form", because lower revenue today forces politicians to trim spending tomorrow. He even argued surpluses are dangerous because they tempt governments into new spending sprees.

Applying Friedman to Australia

• Australia's commodity windfalls show the risk Friedman flagged: royalty jackpots feed new programs that stay after the revenue drops away.
• Modest, predictable deficits tied to essential infrastructure or a Job Guarantee (see below) keep the focus on productive spending, which is still consistent with Friedman's push for discipline.
• Friedman also favoured transparent taxes. A visible annual land tax scores better on that than stamp duty buried in your mortgage paperwork.
• Friedman's litmus test: does each dollar of spending deliver more value than if it were left in private hands? If not, cut it, surplus or deficit.

Immigration, the Tax Base and the Big Four Banks

A steady flow of new workers lets Canberra grow revenue faster than spending and helps keep wages, inflation and bond yields in check. Meanwhile the big four banks channel much of that extra income into mortgages, clipping a margin along the way.

Record inflows keep the revenue tap open

• Net overseas migration added 446,000 people in 2023-24, a little below the 2022-23 record of 536,000.
• The population hit 27.3 million in September 2024, with migration contributing 1.4 percentage points of the 1.8% annual growth.
• Treasury's 2025-26 Budget expected new arrivals to lift income tax and GST receipts, helping hold the deficit near 1.2% of GDP.

More workers, less wage pressure, cheaper debt

• The RBA notes strong migration adds to labour supply and helps contain labour cost growth, easing the path back to its 2-3% inflation target.
• Lower inflation keeps bond yields, and the government's interest bill, in check. The May 2025 rate cut to 3.85% followed trimmed mean inflation falling to 2.9%.

Where the big four banks fit in

• Ticket clipping: Every new household that buys pushes up demand for credit. The bank writes the mortgage, books a fee, and earns the interest margin for 25-plus years.
• Balance-sheet expansion: Because bank lending creates deposits, the majors effectively turn government-injected dollars into private mortgage debt.

Debt-to-GDP snapshot: Australia vs big peers

(International comparisons usually use gross debt. Australia sits well under half the G7 average.)

• Australia's lighter debt load means lower bond yields and a smaller interest bill for Canberra.
• By contrast, the US now spends US$684 billion a year on interest, almost the size of Australia's entire federal budget.
• Migration helps Australia's debt numbers twice: it adds tax-paying workers (growing GDP) and eases wage pressure, reducing the risk of rate hikes that push up borrowing costs.

In short, high migration grows the tax-paying workforce, tempers wage inflation so debt is rolled over more cheaply, and supplies a stream of borrowers whose mortgages the big four happily write. It's the quiet loop that ties people, banks and the Budget together.

What If Canberra Insisted on Surpluses?

Imagine a Treasurer who vows to keep the Commonwealth permanently in the black. It sounds thrifty, but it would push the private sector into the red fast. Here's what the numbers say.

Milton Friedman on Inflation (Who Creates It)

We've tried a mini-version before

• Howard-Costello years (1998-2007). Nine straight cash surpluses coincided with household debt-to-income ballooning from roughly 70% to over 150%, one of the sharpest run-ups in the OECD.
• A BIS paper on that era shows housing debt did almost all the heavy lifting.
• Put bluntly: the Commonwealth stopped borrowing, so families had to.

Fast-forward to today: the maths is crueller

• Australia now starts with household debt of around 190% of income, one of the highest in the developed world.
• If Canberra chased a sustained surplus while the current account stayed in surplus, private borrowing (or running down savings) would need to cover roughly $30 billion a year.

Stress test: plug the gap with mortgages, then prices fall

The RBA has modelled a downside scenario with a 20% drop in house prices and unemployment above 10%. The banks stayed solvent, but their capital buffers shrank and the number of loans in negative equity (owing more than the home is worth) rose sharply.

• A 20% fall would push a meaningful share of mortgages underwater, especially recent buyers in newer outer-suburban estates who bought near the peak with small deposits.
• Treasury's sensitivity analysis suggests every 10% slide in dwelling values cuts around $2 billion off annual CGT receipts. A 20% fall doubles that hit.

Stamp duty and CGT dominoes

• States would lose roughly $4-5 billion a year in stamp duty if median prices fell 20%, using Grattan Institute estimates.
• Lower turnover also cuts GST and income tax from the building trades, deepening the hole.

The private sector's shock absorber is already full

• The RBA's 2024 Financial Stability Review warns that higher-than-expected rates or unemployment could magnify borrower stress, because buffers are thinner than before the pandemic.
• Household saving has dropped back near zero, leaving little room to absorb the extra tax a surplus strategy would need.

Smarter Ways Forward: Keeping the Wheels Turning Without Leaning on House Prices

Australia doesn't have to choose between endless public red ink and turbo-charged mortgages. Here are five levers economists keep pointing to. None is a silver bullet, but together they could recycle mining profits, keep demand steady and take the heat out of property speculation.

Swap stamp duty for a broad-based land tax

• Why it helps: Stamp duty slugs buyers up front, discourages downsizing and keeps people stuck in the wrong homes. A broad annual land tax spreads the bill, removes the barrier to moving, and could add up to $17 billion a year to GDP.
• Evidence: The ACT's 20-year transition shows it's politically doable. NSW's short-lived First Home Buyer Choice hinted at the benefits before it was scrapped.
• Design tip: Credit low-income owner-occupiers and farmers, phase in slowly, and keep the rate flat so it can’t be gamed.

Make gas exporters pay a fair share through a stronger resource rent tax

• Problem: The Petroleum Resource Rent Tax and royalty system lets some LNG exporters book windfall profits while paying low effective tax rates.
• Fix: Tighten deduction caps and anti-avoidance rules, building on Treasury's recent PRRT changes.
• Pay-off: The Australia Institute estimates $18 billion extra over four years from modest tweaks, money that could fund social housing or infrastructure.

Guarantee jobs before chasing surpluses

• Idea: A federally funded Job Guarantee offers work at a basic wage to anyone who wants it, so the economy keeps a buffer of employed people instead of unemployed ones.
• Numbers: Modelling by the University of Newcastle's Centre of Full Employment and Equity (CofFEE) puts the cost of cutting unemployment from 10% to 4% at about $52 billion a year.
• Inflation guard-rail: Jobs are limited to socially useful roles (landcare, aged care support) so they don't compete with private employers for workers.

Use targeted credit controls instead of across-the-board rate hikes

• Works in practice: APRA's 2017 cap on interest-only lending and its 2021 increase in the serviceability buffer cooled investor lending within months, without smashing first home buyers.
• Keep in the toolkit: Lift risk-weights on high-LVR investor mortgages, or cap debt-to-income ratios when prices start overheating again.

Accept small, steady deficits as the price of full employment

• Reality check: Treasury's Mid-Year Outlook showed a $26.9 billion deficit for 2024-25 even after a one-off surplus, and net debt still sits well below the advanced-economy average.
• Why that's fine: As long as the spending uses idle capacity, deficits build real assets like better rail and cleaner power, not just higher house prices.
• Bonus: Low public debt keeps Australia's AAA rating, so borrowing for long-term infrastructure stays cheap.

What This Means for Your Build

You can't control Canberra's budget, but you can stop it from wrecking yours:

Don't bank on endless price growth. Governments have strong reasons to keep prices up, but a 10 to 20% fall has happened before and can happen again. Build a home you want to live in, and don't over-capitalise on the assumption the market will bail you out.
Borrow with a buffer. Lenders test you at a rate above today's. Test yourself at a higher one, and keep cash aside for variations, landscaping and the first year of rates.
Count the taxes. Stamp duty on a house-and-land package, or on the land for a knock-down rebuild, can be a five-figure line item. Check your state's first home concessions before you sign.
Watch the rate cycle. Rate cuts push prices and building demand up quickly, which means busier trades and firmer quotes. Get fixed-price contracts signed before the rush if you can.

Conclusion

Money is an IOU, and the national accounts are one huge double-entry ledger. When the Commonwealth runs a surplus, the private sector must run an equal deficit. For the past quarter-century that hole has mostly been filled with household mortgages, turbo-charged by tax breaks and floated on mining royalties. Today about two-thirds of household wealth sits in housing, and state and federal budgets lean on taxes that only flow while prices keep rising.

Australia has alternatives: broaden land tax, tighten resource-rent taxes on gas exporters for an extra $18 billion over four years, and accept small, steady deficits that keep people working and businesses investing.

Deficits aren't a moral failing. They're the accounting mirror of private-sector savings. The real test of fiscal responsibility isn't whether the federal books are in the black, but whether Australians have jobs, services and a roof they can afford.

Why We Wrote This Post

We spend most of our days planning projects, budgets and cost plans and hashing out details with consultants, suppliers, designers and clients, not poring over Treasury tables. Lately, though, we've been digging into why government action on housing affordability feels so underwhelming, especially as migration lifts demand faster than new supply appears.

The deeper we looked at sector balances, MMT and how budgets lean on house prices, the clearer it became that every homeowner is already part of the economic game. If we've done our job, you now see:

• Why a “government surplus” often ends up as extra debt on household balance sheets.
• How mining royalties, immigration, and the big four banks all feed into the property-price loop.
• Why small, well-targeted deficits can keep the wheels turning without sending mortgage payments—or power bills—through the roof.

We're telling the story through our own rose-coloured glasses, and bias is hard to escape. So we've laid out our position, with plenty of help from Paul, and we invite you to critique it.

Meanwhile, if you're at fit-off, grab the C12 Fixing Stage Checklist. We'll get back to construction topics soon.