At first blush, it’s easy to be cynical about the federal budget changes Scott Morrison is announcing today that mean Treasury will attempt to distinguish between different types of debt.
We will now have “good” debt – capital investments aimed at improving the productive capacity of the economy – and “bad” debt, or the borrowing required for recurring spending which places a consistent drag on the budget.
“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,” Morrison said in remarks to an Australian Business Economists lunch in Sydney.
“This is basically the difference between good and bad debt.”
Morrison also explains there’ll be a greater emphasis in the budget on what’s called the “net operating balance” in the budget papers, a number that is essentially the deficit level before counting capital expenditure (think about those as one-off investments). Add net operating balance and capital expenditure and you have the total deficit.
To butcher a phrase from Animal Farm, it’s a case of once-offs good, recurring bad.
This has two important, immediate impacts:
- net operating balances tend to be smaller numbers, so they don’t sound so bad;
- It splits out the “good” debt, which the government will argue are important investments in the future of the economy.
By way of illustration, ANZ sent out this handy chart today showing the net operating balance against the overall deficit.
Clever, clever, eh?
But as I said, this is the cynical interpretation.
The more positive way to interpret this is that it attempts to break a vicious spiral in public policy debate surrounding the importance of surplus.
Surpluses are not the defining feature of responsible or conservative economic management. That lies in prudent use of public money, reducing unnecessary spending, and economic stewardship that promotes growth so that the deficit should naturally erode over time.
Surpluses are actually governments trousering taxpayer dollars to spend for a rainy day.
Surpluses are the government taking money out of the economy.
In a way, surpluses can be seen as the government failing to invest in the country’s future.
But surpluses, since the Howard years, have become the sine qua non of economic policy, with the thinking being that without a “credible path to surplus”, you are unelectable.
This has crimped the ability of both sides of politics to come forward with economic plans that involve well-directed investment spending programs.
The Abbott factor
Tony Abbott rammed it home with his “debt and deficit disaster” campaign against the Gillard government. In his enthusiasm to deliver on his campaign rhetoric he and Joe Hockey cut too hard, too fast, and the electorate rightly turned on them for their disastrous mismanagement of the 2014 budget.
Still, the “path to surplus” – rather than a “path to better budget management” – has remained an essential measure of a party’s fitness for office. Morrison himself has beaten this drum on many occasions, but under the Turnbull administration he has softened his tone at times.
What he’s announcing today is, in my view, a positive step in trying to move away from a binary (and frankly, pretty dumb) conversation about all government debt being a terrible thing. And that has been led by politicians. They’ve painted themselves into a corner, setting out plans to cut spending continually while failing to explain the need for positive investments in the nation’s future.
Australia’s infrastructure is now full of bottlenecks and our universities struggle to make it into the global rankings of third-level institutions.
When the economy’s not exactly crash hot – and remember, we had a negative quarter of GDP growth last year – then that is the time for government to play a supporting role, helping to keep people in jobs, and consumers confident and active.
It’s why over recent years, as it became increasingly clear that monetary policy has its limits in stimulating economic growth, countries around the world have been turning to fiscal policy to bolster their economy.
With Morrison’s proposals, the litmus test will be whether there is an obvious politicisation of the classification of “good” and “bad” government borrowing. If it’s seen to overtly favour, say, infrastructure spending (especially in marginal seats!) and write off all welfare spending as inherently negative, then it will be laughed away.
Andrew Charlton, Kevin Rudd’s former advisor, explained this neatly in a column we published on Business Insider last year:
For a start, monetary policy works (in part) by encouraging the private sector to take on more debt. As interest rates have fallen to record-lows, Australian households have leveraged up to the eyeballs. Fiscal policy, on the other hand, works by taking on more public sector debt. So when it comes to supporting the economy through future weakness, should we be using monetary policy to encourage households to lift their debt even higher than the current 125 per cent of GDP they are currently holding; or should we use fiscal policy which would push up gross public debt currently sitting at just 40 per cent of GDP. It seems obvious that the public balance sheet is the safer option to take on more leverage if that is required to support a weakening Australian economy.
The second cost of monetary policy is its growing drag on productivity. We have long since passed the point where lower interest rates are stimulating entrepreneurship. In fact, low rates are having the opposite effect, inducing Australians to pour their funds into existing assets like housing and equities on the hope that lower rates will increase their value. By contrast, effective fiscal policy can increase productivity through investments in infrastructure which improve growth over time.
The third cost of monetary policy is its impact on inequality. As interest rates have fallen, asset prices have surged – delivering a windfall gain for the wealthy owners of equity and property assets. But low rates have slugged younger people with higher house prices and reduced the weekly budget of older people on fixed incomes. Fiscal policy, by contrast, can be targeted to reduce inequality.
For precisely these reasons, the world is moving to embrace fiscal policy in almost every country – except it seems Australia.
In the US, the incoming Trump administration is pivoting from monetary to fiscal policy. One of Trump’s key economic advisers, Anthony Scaramucci, said recently the incoming administration would be “replacing emergency-level rates with fiscal stimulus”. Trump himself is proposing large fiscal expansion to fund tax cuts and a trillion-dollar infrastructure program.
In the UK, Teresa May has been openly critical of low interest rates, saying they have caused “some bad side-effects”, while her Chancellor Philip Hammond has reversed previous Tory austerity policies and is now ramping up borrowing to invest and spend.
… we have to recognise that there is a difference between government spending on recurrent expenses and investment in assets. Australia needs a short term plan to increase spending on infrastructure and other productive public assets (especially while interest rates are so low) and a medium term plan to reign in recurrent spending over time.
Finally, we need to think of fiscal policy as more than just a means of buying votes from interest groups, or stabilising demand. Effective public investments can boost GDP over the long term by creating demand, boosting business confidence, lifting growth and ultimately reducing, not increasing, the debt/GDP ratio over time.
A more mature role for fiscal policy would take the pressure off the RBA, give us a healthier policy mix, reduce risk in financial markets and take some froth off the housing market.
Nations need governments to invest in some things – education and infrastructure especially – to future-proof the economy.
And to be clear, deficit reduction and good budget management is a vitally important part of economic policy. Saddling up the country with more and more debt is reckless.
But politicians need to be wary of being scared into hoarding the cash in the name of “fiscal responsibility” that ultimately hurts everyone. This is being recognised around the world, and maybe Australia is now ready to join that conversation.
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