After years of lightweight public debate on the issue, the discussion over the size of public debt and what government borrowing should fund is sharpening up, thanks to recent contributions from the Reserve Bank and the Treasurer. Australia sorely needed a better-informed discussion on the merits of government borrowing for nation-building purposes, given the enormous strain on the nation’s creaking infrastructure and the fact it never has been cheaper for governments to borrow.
A recent survey of the Australian Institute of Company Director’s members taken after the Federal Election revealed that nearly one quarter of directors saw inadequate infrastructure spending as a major challenge for the economy. An overwhelming 85 per cent considered the current level of government spending on infrastructure to be too low.
Outgoing RBA Governor Glenn Stevens, in his recent speech to the Anika Foundation event in Sydney, made the distinction between “good” and “bad” public debt. Stevens emphasised that government borrowing for much needed infrastructure that adds to the economy’s productive capacity is superior to borrowing for recurrent purposes. The government did the latter during the darkest days of the financial crisis, when borrowed cash was distributed to households to help keep consumer spending buoyant.
A recent survey of the Australian Institute of Company Director’s members taken after the federal election revealed that nearly one quarter of directors saw inadequate infrastructure spending as a major challenge for the economy.
Scott Morrison joined his voice to Stevens’ soon afterwards in his own set piece speech at the Bloomberg Sydney offices. The Treasurer argued that public debt is a “nuanced” issue and that government borrowing to fund investment in public infrastructure can have significant public benefits. The contributions from our chief monetary and fiscal policymakers were refreshing and ran contrary to what had become, particularly among economic conservatives, conventional wisdom: that higher public debt is undesirable in any circumstances.
The “more government debt is bad” mantra has dominated the debate for too long. This accepted public policy orthodoxy ignores the fact that government actually has significant capacity to borrow right now, unlike the household sector. Increased public borrowing would not necessarily threaten Australia’s coveted AAA credit rating, either, because it would add to our productive capacity, lifting future growth and government revenue, and thus aiding budget repair.
As Governor Stevens pointed out, the government is the one sector of the economy where debt levels are still low relative to history, at about 40 per cent of GDP. This is despite a sharp rise in government debt in recent years caused by successive federal governments running budget deficits year after year, partly to fund the largely unproductive payments to households. Gross household debt at 125per cent of GDP is three times higher than the ratio for the combined public sector.
The benefits of appropriately scrutinised public investment in infrastructure are obvious, particularly in so-called “greenfields” projects where private sector operators are reluctant to assume the associated construction risk. Many of these “riskier” early-phase projects would never be undertaken without government involvement.
Construction of long-lived assets that generate a positive economic return over time allows government to service the additional debt, and the consistent revenue stream later makes the asset attractive to private sector investors. International pension funds, for example, have a great appetite for investment in long-lived infrastructure assets, allowing government to recycle the sale proceeds into other productive assets, creating a virtuous cycle.
Construction of long-lived assets that generate a positive economic return over time allows government to service the additional debt, and the consistent revenue stream later makes the asset attractive to private sector investors
The provision of public assets – be they toll roads, ports, rail links, power generators, airports or roads – prudently assessed and constructed, can lift productivity and add to the economy’s capacity to produce more, lifting potential growth. The construction phase also has clear benefits for national economic activity and employment.
There is a separate debate to be had about which infrastructure assets are funded by additional government borrowing, and the appropriate governance arrangements. Careful assessment of the costs and benefits associated with each prospective investment needs to be undertaken, with projects not chosen based on political expediency and opportunism, which has been the case too often in the past.
Australia’s track record here is patchy at best. We as a nation need to do much better, but as an urgent priority government should not miss the rolled-gold opportunity presented by record low borrowing costs to invest in the nation’s productive capacity and future prosperity.