Unravelling good debt

And, “the sleeper is the blame and criticism that will be levelled at the ‘superannuation’ system - including the Government, for enforcing contributions to super and fund managers”.

Another issue likely to get far more airplay in the year ahead is the shocking growth of Australia's international debt. The last number Henry saw for Australia's international debt was not far shy of $700 billion, and rising. Much of this is owed by Australia's banks.

Treasury (supported by some of the economists of the Australian National University), has traditionally regarded international debt as good debt, financing Australia's development.

Sadly, however, that view is largely wrong.

Tony Makin today issues a qualified mea culpa on behalf of his former Canberra-based colleagues. (The final paragraphs of this biographical account reports the 1980s debate and policy action.)

Most of Australia's international debt has financed not productive investment, but rather a massive housing boom and consumption that is well in excess of Australia's capacity to supply. The Canberra view, that this was good debt, was severely shaken when the Lehman Brothers collapse caused interbank lending to dry up virtually overnight. The debt of the Australian banks would not have been refinanced except for the prompt loan of Australia's triple-A credit rating to these banks.

While it is an over-simplification, there is a sense in which one should add the Government's domestic debt to the total overseas debt to get an estimate of Australia's over-spending and the constraints on policy action - the “no ammo” issue.

It was the over-spending in the 1920s that made the 1930s so severe for Australia, as it was for other debtor nations.