David Leyonhjelm on good debt and bad debt

In delivering more debt and deficits, Treasurer Scott Morrison recently made a point of explaining that there is good debt and bad debt.

Bad debt is when the Government borrows to fund things that are lapped up straight away and disappear without a trace, like welfare payments, subsidies to businesses, and wages to public servants. Bad debt amounts to forcing future generations to pay for the benefits enjoyed by the current generation.

Good debt is incurred to fund the purchases of assets, which generate a stream of benefits over time. By funding asset purchases through debt, and then repaying this debt over time in line with the asset’s depreciation, those who benefit from it end up paying for it.

This year the Government is increasing its gross debt by more than $80 billion. At least $25 billion of this is unmistakeably ‘bad debt’, reflecting the borrowing required to pay for spending on things like welfare, public service wages and ‘current’ grants that exceed government revenue. That’s more than $1,000 of new ‘bad debt’ for every Australia just for this year.

A further $13 billion is for ‘capital’ grants. These are grants from the Commonwealth Government to businesses, universities and state, territory and local governments, provided on the condition that they are used to purchase assets. The Government argues that such borrowing to fund capital grants is ‘good debt’.

There are two big problems with this argument. First, capital grants often do nothing to boost asset holdings because the recipients will purchase assets irrespective of whether or not they get a grant. Second, even if capital grants do boost asset holdings, these assets aren’t owned by, and often don’t benefit, Commonwealth taxpayers. But Commonwealth taxpayers remain responsible for paying off the debt. Incurring debt so that someone else benefits shouldn’t be considered ‘good debt’.

Another $4 billion is being used to bolster the physical assets of the Commonwealth, like buildings and specialist military equipment. The Government calls this ‘good debt’ based on the assumption that its purchases of physical assets are good value for money. But purchasing an office building in Armidale so that a government bureaucracy can be relocated to Barnaby Joyce’s electorate may not be a sound investment decision. And choosing to build the submarines in South Australia is definitely not.

$19 billion is being used to purchase financial assets like more equity in the NBN. If you think this sounds like a good investment, I’ve got a coat-hanger shaped bridge in Sydney I might interest you in. Alas, this is also classed as ‘good debt’.

More than $20 billion of the Government’s new borrowing this year has no particular purpose. The Government is undertaking this borrowing just to ensure that there is a lot of Commonwealth Government debt for financial markets to trade. This is nothing more than industry assistance. Nonetheless, the Government calls this borrowing-for-the-sake-of-borrowing ‘good debt’.

So this year, when the Government adds more than $80 billion to its gross debt, $25 billion is universally agreed to be bad debt while the remainder can easily be described as bad debt too. Future generations need to pay it off, and they’ll have next to nothing to show for it.

Borrowing to fund vital infrastructure like roads, railways and ports is mentioned by the Treasurer, but the Commonwealth Government does none of this. It is state governments that own and undertake such investment. The Commonwealth is merely cheering the states along, and trying to pick up some reflected glory in the process.

It is time the Government stopped talking about living within its means, and actually started doing it. Rather than pull out new excuses for continued budget failings, the Government ought to simply stop borrowing. This would slow the Canberra economy but would leave the rest of us largely unaffected. It would help retain our AAA credit rating and keep interest rates low. And it would stop intergenerational theft in its tracks.

The Government has been incurring bad debts for years. But for the sake of the next generation, it must stop. Like many Australian householders peering into the post-Christmas fridge, it’s time to go cold turkey.

David Leyonhjelm is a Senator for the Liberal Democrats

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21 Responses to David Leyonhjelm on good debt and bad debt

  1. stackja

    The Government has been incurring bad debts for years. But for the sake of the next generation, it must stop. Like many Australian householders peering into the post-Christmas fridge, it’s time to go cold turkey.

    RGR?

  2. .

    Australian Government Securities on Issue 464,791 million AUD

    Source: http://aofm.gov.au/

    The coupon on Australian bonds is between 4.5% and 5.75%. So let’s say 5.10% for a round figure.

    That’s over 23 billion a year in interest payments.

    A few years ago, this could have translated into a permament doubling of the size and capability of the ADF.

  3. a happy little debunker

    Agreed & whilst we are at ‘drain the swamp’.

  4. john constantine

    Good Senator Dave calls the creation of government debt for the financial markets simply a form of industry assistance.

    Never thought of it like this before, i have felt uneasy about it, but because they keep rolling out social justice aristocrats from within the public service to continually hammer that their social justice debt markets need government debt so they can function as markets, i have always just hopelessly given up and accepted it as part of their system.

    Time for a rethink.

  5. Anonymous

    The universities should get no capital grants. The university sector already trades the right to permanent residence in Australia in order to attract overseas students. These students often clog campuses and devalue the currency of Australian degrees. And when they stay on they reduce graduate employment opportunities for local students and gain other expensive entitlements like Medicare and the social security safety net. The universities conveniently forget this in their self-important lecturing about being such an important export industry. If, for example, Holden had been able to offer permanent residence to an overseas buyer of their cars, their business would be booming today. The universities should be compensating the government for their appropriation of a public good for private profit.

  6. Dr Fred Lenin

    Governments should not by law ,be allowed to spaend ANY taxpayer money ,without a full accounting of purpose and then be subject to referendum . Career politics and politicsl parties should e abolished . Public servants and judges should be on one year contracts with salary based on productivity .and subject to dismissal without compensation for misdemeanours .

  7. Baldrick

    Spot on by DL, more like this please.

  8. RobK

    A few years ago now I heard a boffin on ABC RN explaining it is good for the government to have debt in bonds so they were a known player in the market. I realized then we had little hope. Bankers think money is a commodity, and so it is for them. The system is structured that way, never mind it representing value of goods and services. It cycles quicker than production thanks to obscure derivitives and projects into the future without bounds. It is apt to run out of control. Back to basics for all of them. Cold turkey is a good start.

  9. Habib

    No such thing as “good debt” with regards to government. Even when they ostensibly spend on infrastructure and the like, rarely if ever is a cost benefit study done (but shitloads of worthless enviro/social impact ones are, further enriching the parasite spiv class), it’s usually done at the wrong place and the wrong time (usually for short term electoral advantage), takes far longer than an equivalent private project, and costs many times more due to inefficiency, featherbedding, cronyism, and outright criminal corruption and collusion. Government has become our enemy.

  10. King Koala

    But purchasing an office building in Armidale so that a government bureaucracy can be relocated to Barnaby Joyce’s electorate may not be a sound investment decision

    But its still a brilliant decision. Time to relocate all government departments to small towns at least 300 km drive from the nearest capital city. It benefits both the economy of the small town and keeps the public servants in touch with normal Aussies. Send the department of education to Dubbo.

  11. wal1957

    And this is one of the major reasons I will not vote Liberal at the next election.
    I have had a gutful of the incompetent idiots throwing MY money around, and then happily borrowing more IN MY NAME to fund crap!
    Many people I know voted for the minors at the last election. I think a lot more will be doing so at the next one!

  12. Confused Old Misfit

    “Time to relocate all government departments to small towns at least 300 km drive from the nearest capital city.” This is a good idea. I have seen it tried, albeit on a provincial scale, in Canada.
    In the beginning it appears to work. However, at some point, ambitious department heads and managers find that they simply MUST travel up to the Capital to put their case for this, that or the other thing, but mostly to see and be seen and to advance their own careers.
    Eventually there is a semi-scandal over travel expenses and rorts and presto! An election campaign issue! And as sure as God made little green apples, the next administration comes in on a promise of centralisation and savings.
    Of course they fail to mention the expense that will be incurred when The Department of XYZ brings all of its employees back to The Capital from beyond the Black Stump and a new huge shiny office tower needs to be built to house them all and to assist the downtown core development. But that will be all right because we’ll overbuild it (planning for the future) and lease out the unused space to the private sector!

    It makes one ill.

  13. But its still a brilliant decision. Time to relocate all government departments to small towns at least 300 km drive from the nearest capital city. It benefits both the economy of the small town and keeps the public servants in touch with normal Aussies. Send the department of education to Dubbo.

    Wilcannia.

  14. King Koala

    However, at some point, ambitious department heads and managers find that they simply MUST travel up to the Capital to put their case for this, that or the other thing, but mostly to see and be seen and to advance their own careers.

    That’s easily fixed. No more travel entitlements at all. All meetings to be done with video conferencing or over the phone. If some government lackey wants to use his day off or holiday leave or weekend to travel to Canberra/ the state capital to kiss ass then let them waste their own money doing it.

  15. Zulu Kilo Die Onuitspeeklike

    Wilcannia.

    Earmarked for “Department of Aboriginal Affairs.”

  16. Don't let the facts get in the way

    The effective yield on gross government debt last financial year was 3.74% on an average balance of $418bn, equating to $15.6bn in gross interest. So that’s a saving of $7.4bn already vs the above estimate. Or about a third. Perhaps they’ve been issuing some ‘good’ debt while rates have been low.

    Source: AOFM Annual report. Table 3 of Part 2: http://aofm.gov.au/publications/annual-reports/annual-report-2015-16/part-2-performance-and-outcomes/

  17. Squirrel

    And let’s not forget that the federal government income which never quite seems to be sufficient – hence the ever-growing debt – includes a fair chunk of money derived from flogging off a fixed endowment of mineral assets.

    Plus many to the comments from Anonymous about universities selling the prospect of permanent residence – it would be interesting to see what would happen to overseas student numbers if that was taken off the table.

  18. .

    Don’t let the facts get in the way
    #2254843, posted on January 7, 2017 at 8:04 pm
    The effective yield on gross government debt last financial year was 3.74% on an average balance of $418bn, equating to $15.6bn in gross interest. So that’s a saving of $7.4bn already vs the above estimate. Or about a third. Perhaps they’ve been issuing some ‘good’ debt while rates have been low.

    Source: AOFM Annual report. Table 3 of Part 2: http://aofm.gov.au/publications/annual-reports/annual-report-2015-16/part-2-performance-and-outcomes/

    Wow. We should be so lucky.

  19. Don't let the facts get in the way

    Well your point might be well made without needing to resort to inflate the costs by 50%.

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