Federal treasurer Scott Morrison will today announce a new treatment of debt levels in the federal budget.
The new rules will attempt to distinguish between “good” debt – which the Treasurer characterises as capital investments aimed at improving the productive capacity of the economy – and “bad” debt from recurrent spending programs which create persistent drag on the budget.
In a speech today in Sydney, the Treasurer will also announce that levels of government debt will be assigned to various portfolios. “We all need to understand what is driving the growth in our public debt and we need to budget in a way that creates accountability for increasing public debt and the interest payments that go with it,” Morrison will say.
The key element of his pre-released comments are published in full below.
He will also flag an increased focus on the “net operating balance” in the federal budget this year, which is slightly smaller than the overall “fiscal balance”.
ANZ economists noted this morning that New Zealand already uses the net operating balance as the main indicator of the budget position.
The fiscal balance is the standard measure of the budget deficit or surplus and is simply the net operating balance minus net capital expenditure. Here’s how it was presented in last year’s budget papers.
High levels of recurrent spending through the likes of welfare and health payments are a significant drag on the budget bottom line. However, countries around the world seeking to kickstart their economies after years of ultra-low interest rates have been turning to fiscal measures – government debt-funded investment, typically in infrastructure and education.
Economists have increasingly been arguing that Australia needs to deploy government investments to support the economy. Andrew Charlton, a former Labor government economic advisor, argued last year that “the world is moving to embrace fiscal policy in almost every country – except it seems Australia.”
Here’s an extended excerpt of Morrison’s pre-released remarks ahead of today’s speech:
Our first priority for budget repair remains controlling growth in expenditure. It is not sustainable for Australia to continue financing our recurrent expenditure by borrowings.
Australians understanding taking out a mortgage to pay for their home is a wise investment for their future. But they also know that putting your everyday expenses on the credit card is not a good idea. It doesn’t end well.
This is basically the difference between good and bad debt.
The same is true for Government.
It can be very wise for Governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth producing infrastructure assets, such as transport or energy infrastructure. But to rack up government debt to pay for welfare payments, Medicare costs or other everyday expenses, is not a good idea. This is a critical part of ensuring that Government lives within its means.
The way we have done budgets in the past at the Commonwealth level does not currently make the distinction between good and bad debt.
All debt is lumped in together, whether it is for capital or recurrent purposes.
In this Budget we will be making changes to the way we report Government debt and link it to Government spending, by increasing the visibility on good and bad debt.
These changes will make clearer the share of expenditure that is contributing to investment that increases productive capacity and produces future income and the debt that is being incurred to deal with everyday expenditure.
This will be done by reporting the net operating balance alongside the underlying cash balance. The underlying cash balance does not differentiate between recurrent expenditure and investment in productive capital, including infrastructure. The net operating balance helps to make this distinction.
In this budget we will also be assigning the level of Government debt across portfolios. We all need to understand what is driving the growth in our public debt and we need to budget in a way that creates accountability for increasing public debt and the interest payments that go with it.
Currently, when increases in expenditure are proposed the public debt implications are considered separately. Imagine if in your own household or business, someone wanted to spend more but didn’t have to account for the credit card debt and interest to pay for it. What would happen? What we are doing is beginning the process of changing this spending culture. Portfolios will be held responsible for the debts they are incurring for future generations as a result of their expenditure.
At the same time we will be providing room for common sense decisions to invest in our economy, by utilising our balance sheets to support investment that boost growth and the jobs and wages that depend on that growth.
Investments in productive capital projects provide returns that will be enjoyed by future generations. This is why it is important that we think about these investments in a different way to recurrent spending.
While the net operating balance has been a longstanding feature of our budget papers, it has not been in clear focus. This change will bring us into line with the states and territories who report on versions of the net operating balance. Key international counterparts, including New Zealand and Canada, also focus on similar measures.
The underlying cash balance will, of course, continue to be the key measure reported in the budget papers. It remains the basis for our fiscal strategy of achieving a sustainable budget surplus as soon as possible. Nothing changes about this core strategy.
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