Obsession with national debt hypocritical, says analyst

By |

A top research analyst has branded government attempts at economic surplus as ‘inappropriate’, saying the RBA’s decision to lower the cash rate last month is a ‘warning sign’ of short-sighted fiscal policy.

Australian Institute (TAI) senior research fellow David Richardson said that a lot of commentators are scaring the public about the level of government debt and the deficits that bring about debt, when the debt is not such a bad thing.

He points to comments by people such as Don Argus, a former chair of the board at NAB, who has warned that Australia is in dire need of a productivity boost if it is to offset fast-growing gross national debt. Argus has argued that Australia is set to inherit the same challenges confronting stricken economies elsewhere in the world.

But Richardson believes this argument is hypocritical, given the level of (perfectly acceptable) debt experienced by most major companies.

“Mr Argus should know about debt. On the latest figures, the NAB had total debt of $345bn, well above the government debt expected in June this year at $162bn, or 11% of GDP. There is, of course, no reason to suppose that NAB is in any difficulty, that's just what banks do. They borrow in order to lend, and as long it's done prudently there is nothing wrong with borrowing.”

Likewise, this is what governments should do, Richardson said. “Borrow when they need to go into deficit for the health of the economy and repay debt if they need to offset unhealthy booms. We rarely ask why government should repay debt.

“Westpac… has been around for almost 200 years and it never saw fit to pay off its debt, which now stands at $450bn. OK, that's a bank and they are different, but BHP Billiton in one form or another has been around for over 150 years and still owes $62bn, according to last year's annual report. Nobody complains about the morality of BHP Billiton for spending its money on its shareholders rather than repaying debt. But governments are supposed to have some moral objective involving a debt reduction strategy.

“Let's ask who is being hurt by the high levels of debt? How are they being hurt? And how will they be made worse if that debt increases a bit?”

Richardson also argued that one of the reasons the Reserve Bank lowered interest rates was because growth was expected to be below trend in 2013. This was partly because of “fiscal consolidation”, which he said is Reserve Bank code for contractionary fiscal policy.

“That should be a warning. The quest for a surplus is inappropriate at a time when unemployment is at its post-GFC peak and expected to continue upward over the forecast years.”

Disagree with David Richardson's assessment? Contribute to the debate in our comments section below...

Can you afford to buy in this suburb? Find out how much you can borrow

Top Suburbs : midland , darlington , nundah , balga , alderley

go back
  • Shirley SOS says on 04/06/2013 01:42:46 PM

    Um, the interest on debt has to be paid out of the public purse...which means it can't be used to look after its citizens. Businesses balance debt off against profits, something government can't do. All of the running costs of a big debt must come directly out of taxes. Surely this analyst realises, as has Greece etc, that there comes a time that the interest payments are crippling the ability to run the country.

  • Olice says on 04/06/2013 02:10:19 PM

    I think the point this guy is trying to make is not that debt should be ignored, but that there are worse things in the world. Australia can live with it, in the short term. Right now is not a good time to be mungling over the debt issue, when the country needs new infrastructure and a new source of job creation!

  • Simon says on 04/06/2013 11:28:55 PM

    Government debt is used to pay for services that, generally, do not make the government money. This is bad debt in investment terms and should be avoided in the long term or in any excess as it builds on itself and the only ways to repay it are to either make it less attractive for those who would work or produce to do so as they must be more heavily taxed or those services the funds were used for in the first place must be reduced. Far better to improve services through a budget surplus.

View 1 more comment(s)

Get help with your investment property

Do you need help finding the right loan for your investment?

When investing in property, it is important to make sure that you not only have the lowest available rate that you can get, but also have the correct loan features for your needs.

Just fill in a few details below and we'll then arrange for a local Aussie Mortgage Broker to contact you and work out what features or types of loans are right for your needs. We'll even help with the paperwork. Plus an appointment is free.

How soon would you like a mortgage?
What is your Annual Household Income i $
Do you currently own any Investment Properties?
Do you own your own residence?
How much equity do you have in all your current properties?
First Name
Last Name
Where do you live?
What number can we reach you on?
E-mail address
We value your privacy and treat all your information seriously - you can check out our privacy policy here