As Australia staggers from the April public holiday season to the May Budget, we’re finally seeing signs of a mature debate about debt.
The Treasurer’s view appears to be that the best path to fiscal rectification is to focus on our net operating balance, which reflects deficits to support recurrent government services expenditure, rather than the underlying cash balance, which reflects all debt, including borrowing for infrastructure.
Much of the political criticism of this proposed change in emphasis has been characterised by the assertion that it implies borrowing for people for services such as health, education and ageing is bad debt whilst borrowing for airports and rail lines – and possibly loans to large foreign mining companies – is good debt.
The labels ‘bad’ and ‘good’ may appear judgemental and politically courageous but, from an economic perspective, they’re statements of fact. Briefly, four issues come into play here.
First, there’s the Iron Lady’s concept of handbag economics. Borrowing for healthcare services means simply spending more in a given period than the Government earns through taxes and other revenue sources. It’s debt for consumption, pretty much the Government’s credit card.
Following from that, we have the issue of inter-generational equity. Asking the next generation to pay for your education debt is unreasonable. Asking them to pay for a new airport which they’ll use is not.
Third, debt for non-recurrent activities is productive in a way that recurrent debt isn’t. While getting you back on your feet after an accident – meaning you can return to work – has a productivity element, it’s not comparable with the potentially economy-magnifying effects of a new railway.
And finally, it’s easier to use this kind of debt efficiently. Government finance can be effectively leveraged by auctioning rights to build and operate infrastructure via PPPs and similar mechanisms. In contrast, we’ve seen some disastrous and highly inflationary attempts at leverage in relation to childcare, education, healthcare and ageing.
The opening paragraph of the ABS Explanatory Notes to its Government Finance Statistics (5512.0) begins: The main functions of government are the provision of non-market services, the regulation of economic and social conditions, and the redistribution of income between sections of the community. These activities are primarily financed by taxation and are carried out by entities in the general government sector.
This pretty much sums it up. None of this is sensibly augmented by debt financing, other than for brief transitional moments in the economy. Borrowing to pay for social welfare outcomes is redistributing tomorrow’s money, not today’s, and it’s easy to predict where that ends up.
There will be challenges here. It’s important that the principle be carried through to focus on the most productive infrastructure, not simply the most politically important. In addition, it will require courage to maintain the argument against debt-finance for health and ageing services: the demand to reintroduce indexation on payment systems which already exceed revenue sources is particularly problematic.
All of which said, the Treasurer’s approach is a massive positive step in moving from an incoherent debate about fiscal reform to one which aligns policy with the proper role of Government.
Alastair Furnival and Catherine McGovern