Good debt, bad debt

In delivering more debt and deficits, Treasurer Scott Morrison recently made a point of explaining that there is good debt and bad debt.

Bad debt is when the Government borrows to fund things that are lapped up straight away and disappear without a trace, like welfare payments, subsidies to businesses, and wages to public servants.  Bad debt amounts to forcing future generations to pay for the benefits enjoyed by the current generation.

Good debt is incurred to fund the purchases of assets, which generate a stream of benefits over time.  By funding asset purchases through debt, and then repaying this debt over time in line with the asset’s depreciation, those who benefit from it end up paying for it.

This year the Government is increasing its gross debt by more than $80 billion. At least $25 billion of this is unmistakeably ‘bad debt’, reflecting the borrowing required to pay for spending on things like welfare, public service wages and ‘current’ grants that exceed government revenue.  That’s more than $1,000 of new ‘bad debt’ for every Australia just for this year.

A further $13 billion is for ‘capital’ grants.  These are grants from the Commonwealth Government to businesses, universities and state, territory and local governments, provided on the condition that they are used to purchase assets.  The Government argues that such borrowing to fund capital grants is ‘good debt’. 

There are two big problems with this argument.  First, capital grants often do nothing to boost asset holdings because the recipients will purchase assets irrespective of whether or not they get a grant.  Second, even if capital grants do boost asset holdings, these assets aren’t owned by, and often don’t benefit, Commonwealth taxpayers.  But Commonwealth taxpayers remain responsible for paying off the debt.  Incurring debt so that someone else benefits shouldn’t be considered ‘good debt’.

Another $4 billion is being used to bolster the physical assets of the Commonwealth, like buildings and specialist military equipment.  The Government calls this ‘good debt’ based on the assumption that its purchases of physical assets are good value for money.  But purchasing an office building in Armidale so that a government bureaucracy can be relocated to Barnaby Joyce’s electorate may not be a sound investment decision.  And choosing to build the submarines in South Australia is definitely not.

$19 billion is being used to purchase financial assets like more equity in the NBN.  If you think this sounds like a good investment, I’ve got a coat-hanger shaped bridge in Sydney I might interest you in.  Alas, this is also classed as ‘good debt’.

More than $20 billion of the Government’s new borrowing this year has no particular purpose.  The Government is undertaking this borrowing just to ensure that there is a lot of Commonwealth Government debt for financial markets to trade.  This is nothing more than industry assistance.  Nonetheless, the Government calls this borrowing-for-the-sake-of-borrowing ‘good debt’.

So this year, when the Government adds more than $80 billion to its gross debt, $25 billion is universally agreed to be bad debt while the remainder can easily be described as bad debt too.  Future generations need to pay it off, and they’ll have next to nothing to show for it. 

Borrowing to fund vital infrastructure like roads, railways and ports is mentioned by the Treasurer, but the Commonwealth Government does none of this.  It is state governments that own and undertake such investment.  The Commonwealth is merely cheering the states along, and trying to pick up some reflected glory in the process.

It is time the Government stopped talking about living within its means, and actually started doing it. Rather than pull out new excuses for continued budget failings, the Government ought to simply stop borrowing.  This would slow the Canberra economy but would leave the rest of us largely unaffected.  It would help retain our AAA credit rating and keep interest rates low.  And it would stop intergenerational theft in its tracks. 

The Government has been incurring bad debts for years.  But for the sake of the next generation, it must stop.  Like many Australian householders peering into the post-Christmas fridge, it’s time to go cold turkey.