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What is the difference between good debt and bad debt?

What is the difference between good debt and bad debt?  Well I will let the Federal Treasurer Scott Morrison have the final say below.

However before he does …. increasing debt to fund infrastructure that delivers long lasting economic benefits is an investment in our children’s future. Things such as building roads, NBN, education, ports, dams and railway lines enable economic growth and create jobs for decades to come.

However increasing levels of debt simply because we are spending more than we are earning to run government each year is a major problem that must inevitably be addressed.

I have provided a graph that illustrates the extent of the challenge before the Federal Government with the rapid accumulation of debt since 2007-08.

This largely arose from the then Federal Government’s (Rudd/Swan) stimulus packages for the Australian Economy in 2008-09 to guard against a global recession caused by the Global Financial Crisis.

Unfortunately the Australian public has become addicted to this level of Federal expenditure.  Repeated attempts by this and the previous Federal Government to reign in spending have met with disappointing failures at the hands of the Australian Senate.

It was absolutely the right call in 2008 to loosen the Government purse strings to stare down the GFC but we are as a result on a trajectory where net debt will peak at $364 billion in 2019-20 with an annual interest bill of $14.7 billion. Quite simply we have not since turned the expenditure tap off.

What I like about the Treasurer’s comments today is the transparency that will be created in terms of how we are incurring our debt.  If the public has a better understanding then ultimately a Federal Government may be supported for taking the tough decisions.

Fixing this problem should not be something we foist upon our children and future generations.

Over to the Treasurer ………..

"Australians understand 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.

This is basically the difference between good and bad debt. The same is true for Government.

It can be very wise for Governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth producing infrastructure assets, such as transport or energy infrastructure. But to rack up government debt to pay for welfare payments and other everyday expenses, is not a good idea. This is a critical part of ensuring that Government lives within its means.

The way we have done budgets in the past at the Commonwealth level does not currently make the distinction between good and bad debt.

All debt is lumped in together, whether it is for capital or recurrent purposes.

In this Budget we will be making changes to the way we report Government debt and link it to Government spending, by increasing the visibility on good and bad debt.

These changes will make clearer the share of expenditure that is contributing to investment that increases productive capacity and produces future income and the debt that is being incurred to deal with everyday expenditure.

This will be done by reporting the net operating balance alongside the underlying cash balance. The underlying cash balance does not differentiate between recurrent expenditure and investment in productive capital, including infrastructure. The net operating balance helps to make this distinction.

In this budget we will also be assigning the level of Government debt across portfolios. We all need to understand what is driving the growth in our public debt and we need to budget in a way that creates accountability for increasing public debt and the interest payments that go with it.

Currently, when increases in expenditure are proposed the public debt implications are considered separately. Imagine if in your own household or business, someone wanted to spend more but didn’t have to account for the credit card debt and interest to pay for it. What would happen? What we are doing is beginning the process of changing this spending culture. Portfolios will be held responsible for the debts they are incurring for future generations as a result of their expenditure.

At the same time we will be providing room for common sense decisions to invest in our economy, by utilising our balance sheets to support investment that boost growth and the jobs and wages that depend on that growth.

Investments in productive capital projects provide returns that will be enjoyed by future generations. This is why it is important that we think about these investments in a different way to recurrent spending.

While the net operating balance has been a longstanding feature of our budget papers, it has not been in clear focus. This change will bring us into line with the states and territories who report on versions of the net operating balance. Key international counterparts, including New Zealand and Canada, also focus on similar measures.

The underlying cash balance will, of course, continue to be the key measure reported in the budget papers. It remains the basis for our fiscal strategy of achieving a sustainable budget surplus as soon as possible. Nothing changes about this core strategy."

The Hon Scott Morrison, Treasurer, Address to the Australian Business Economists, The Westin, Sydney 27 April 2017

http://sjm.ministers.treasury.gov.au/speech/006-2017/

 

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