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The Forum > Article Comments > Why is Australia so opposed to public debt? > Comments

Why is Australia so opposed to public debt? : Comments

By Fred Argy, published 7/10/2008

Why is the Australian Political Left and so much of the popular media so debt-allergic?

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I think we're lucky to some extent that the federal government has been so frugal for so long. It gives them a lot of room to apply pump priming while the rest of the world melts down. One thing I think you left out of your analysis is that we are facing a potential contraction in money supply just because most borrowers are judged as uncreditworthy, so lenders are sitting on cash and projects and businesses are being starved of cash.

The only borrowers in the world who must look OK, are governments. As a result, I wouldn't be too worried about crowding out etc. effects - there's little to crowd-out at the moment.

The aversion to debt per se doesn't make a lot of sense to me. I think in Australia it is probably a reaction to the profligacy of the Whitlam government, as well as the expansion at the end of the Fraser period. It has to be concern that the government won't spend the money wisely. Surely it couldn't really be opposition to the proper use of debt, which is to invest in assets with a higher rate of return than the debt.
Posted by GrahamY, Tuesday, 7 October 2008 11:07:50 AM
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Another reason for the Government's aversion to debt is as a counterweight to the past ideology of being in debt (Whitlam etc). After a period of time in any politcal or societal orthodoxy, barnacles appear on the hull of the ship as people lazily intone the same views and arguments as those who engineered the last great change.

There comes a time when the only way to stop the system from seizing up through indolence, is to give the opposing ideology a run, thus tending back toward ideological balance. This is the equivalent of taking the ship into drydock and airblasting the barnacles off.

When the current era of wealth and individualism reaches its sustainable limit, it too will be consigned to the dustbin of history by a successive opposing ideology, and so on.
Posted by RobP, Tuesday, 7 October 2008 12:18:13 PM
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I’d agree that avoiding deficits as an article of faith is silly, but there are some other reasons why governments in general and Labor ones in particular are debt averse.

Firstly, RobP is right, the fiscal laxity of Labor governments at Federal and State levels in the past left a large hangover of debt that took a long time to get back to manageable levels. In order to be perceived as responsible fiscal managers Labor administrations nowadays have to be more conservative than the Conservatives.

Second, it’s a lot harder to finesse pump priming than the article implies. By the time a project is planned, prepared and hits its straps, the trough of the economic cycle is often past – witness Keating’s “One Nation” package. Having projects “in the bag” could speed things up a bit, but it will be difficult to have worthwhile and productive investments on hold in case of an economic downturn.

Third, although the future is looking increasingly bleak, current economic conditions still very tight, with very low unemployment, strong private sector business investment and very low household savings rates. If we’re already operating at full capacity then pump priming will have to be very cleverly judged indeed to take up the slack as private activity slows. More likely it will just cause inflation, crowding out or the other baddies Fred lists.

Fourth, there is intergenerational equity to consider – if we’re going to load debt onto future generations, we must be sure we bequeath them productive assets (not necessarily excluding social infrastructure). Non-productive public spending like the bridges to nowhere Japan built in the 1990s in an effort to stimulate demand just make economic life harder for future generations
Posted by Rhian, Tuesday, 7 October 2008 3:27:44 PM
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There are other reasons that many people oppose government debt, and consider that infrastructure projects should be financed out of current earnings. Many who read Australian history are grateful that the current Federal government will not have to default on its debt in the coming depression, like its predecessor had to in 1931.

The interesting thing to me is that addiction to debt is not solely a characteristic of left-wing governments, as the Bush administration has demonstrated. Advocates of increased debt should remember what the Chinese call the "nuclear option", which is for China to dump $US 2 trillion of US treasury bonds on the market at one time, sending interest rates to 150% or more.

The coming depression is going to be hard enough in Australia, without the indulgence of additional debt. If work has to be found for the unemployed, fair enough, but finance it from extra taxation.

Always remember Napoleon's adage: "You don't worry about the stables when the house is on fire". We will be very lucky this time if our enormous private foreign debt is not called in, as RAMS was last year.
Posted by plerdsus, Tuesday, 7 October 2008 11:04:11 PM
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This is a comment on Pierdsus's statement that 'the current Federal government will not have to default on its debt in the coming depression, like its predecessor had to in 1931.'

It is my understanding that Australia has always claimed that it has never defaulted on its debts. On 25 March 1931, Premier Lang of NSW advised Prime Minister Scullin that NSW would not be able to meet interest of about three quarters of a million pounds that was due to the Westminster Bank and the Bank of England on 1 April. However Scullin, after consulting with the other States, paid the interest that NSW had evaded (Bede Nairn, 1986, 'The Big Fella', pps. 229, 231). There was certainly no default by the Federal Government on that occasion: the Federal Government acted to prevent what would otherwise have been a default by a State,

The Premiers Plan that was subsequently agreed to by all of the Premiers provided for the conversion of internal government debts at a reduced rate of interest. This may have amounted to default, but the Premiers didn't see it that way, and the principle of reduced interest rates for internal loans had been discussed before Lang's plan to repudiate overseas loan commitments became a subject of violent controversy
Posted by IanC, Thursday, 9 October 2008 2:48:05 PM
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Another reason, Fred, is that state governments have an appalling record in backing wealth-destroying infrastructure projects - those that have returns (if any) less than their opportunity cost. You might recall that about ten years ago you correctly advised the Queensland government that most viable infrastructure opportunities were in SEQ, and that promoting growth in SEQ would boost regional economies more than the non-viable regional infrastructure projects which got about two-thirds of state infrastructure funding (because of the regions' economic linkages with SEQ). Your paper was, of course, buried, I was the only one to support it, and the state continues to back non-viable and poorly assessed projects.

There is very little understanding of or support for sound economic principles at state level, and the chance of counter-cyclical infrastructure spending being productive is very low. In addition, lead-time from the green light to starting work is very long. You suggest countering this by having a "stand-by" list of projects; but if they were worthwhile, how long could they be held on stand-by?

Any projects proposed by states for federal funding would have to be subject to rigorous independent scrutiny, perhaps by the Productivity Commission or by non-government sceptics such as the CIE.
Posted by Faustino, Thursday, 9 October 2008 3:46:42 PM
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The past practises of the labor gov of spending more than than its income (as per the Carr and Iemma gov) has left subsequent governments with the mess to clean up.

The need to incur a deficit is only valid in a recession to stimulate the economy. With growth falling to 2% from 4% and low unemploymet there is still no justification.

The author should not be allowed a credit card.
Posted by Shadow Minister, Monday, 13 October 2008 8:47:02 AM
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