Money is not cheap at the moment

Yesterday morning I was on ABC National Radio on the Outsiders segment talking about the events of the week. One of the topics that came up was Tony Abbott’s comment about debt of 60% not being bad. I suppose compared to what it could be 60% isn’t bad, but it isn’t good at all either.

One of arguments we hear about public debt at the moment, is that money is cheap. By implication the government should be borrowing a lot more at the moment. To be fair, interest rates on government bonds are low at the moment – around 2% or so. That seems pretty low. The problem is what is seen and unseen. That 2% isn’t the cost of borrowing to the government, it is the rate of return investors require to lend money to the government. The cost of borrowing to the government is the cost of taxation. Taxpayers, both now and in the future, are paying a lot more than 2%.

All borrowing is future taxation (I’m going to abstract from inflation). The government is having to borrow now because it cannot raise sufficient revenue to finance its current expenditure. So the taxation associated with current expenditure is being deferred into the future – that in turn imposes costs on the economy. For a start entrepreneurs know that taxes will be higher in future than they are in the present undermining incentives to invest in the present. That implies that future generations will inherit a smaller capital stock than otherwise and pay more for the ‘privilege’ of being poorer due to our current government expenditure.

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23 Responses to Money is not cheap at the moment

  1. Andrew

    Any mention of Reinhart & Rogoff?

  2. sabrina

    So well written in simple language, such people should be in the parliament. Thanks Sinc.
    Stand in the election if your situation permits.

  3. Bruce of Newcastle

    A debt of 60% (of GDP) means $1 trillion Australian. Approximately half of that is government: federal, state and local.

    That is about 500 hospitals. One single hospital was headline grabbing news durng the last election.

    At the low interest rate of 2.25% we incur a coupon of at least $11.25 billion a year, which is another 11 hospitals not being built. If interest rates go up this balloons rapidly.

    Debt takes money from ordinary taxpayers and gives it to investors. Why do Labor go on and on and on about how marvellous debt is?

  4. Andrew

    No. Why?

    Kind of relevant to the debt and deficit debate and its effect on the economy.

  5. AP

    What is the cost to the economy of an additional 6% of GDP taken as taxation?

    i.e. if the principal was paid off evenly over ten years through increased taxation, what kind of a hit to the economy would you see vs the alternative where we had no debt?

  6. .

    In short monetary policy is inflationary and any “cheap” public borrowing is not only paid for in future tax liabilities which would be more than now, it would also rob people through lowering real wages via the predicated inflation.

  7. Just looked at the ABC act. There is a way to control the ABC -a) put nothing for them in appropriations
    b) let them borrow money from treasury for which the treasurer can stipulate how it is spent, eg for country based radio and TV, without going through the senate.
    Then put forward amendments to the ACT linked with financing. One important amendment needs to be to get rid of the staff elected Director. Another is an independent review panel particularly breaches of broadcast guidelines with the power of the lower house of parliament to dismiss, based on breaches, the Chairman and Managing Director of the ABC.

  8. Debt takes money from ordinary taxpayers and gives it to investors. Why do Labor go on and on and on about how marvellous debt is?

    On the simple “black & white” scale, coz Labor are too stupid to understand the harm they are doing.

    To be a little more complex, coz of big spending now = votes = power = somebody else’s worry.
    This does not mean the some, or many, in Labor understand the concept of repayment. They have no concept, they simply know there is “tonnes” of money & everything will sort out.

    We often overlook the stark hard fact that much if not most of the population has no instinct for economics/budgeting or husbanding of resources.

  9. Pyrmonter

    Inflation is taxation by stealth

  10. daggers

    When the subject of debt arises some observers I have seen dismiss it as mostly private debt rather than public, ergo we don’t need to be greatly concerned, and we should all vote Labor. I am yet to hear a knowledgeable, clear and understandable rebuttal of this point. Anyone ? Bueller ?

  11. Sinclair Davidson

    Kind of relevant to the debt and deficit debate and its effect on the economy.

    But why would I mention them and not, say, James Buchanan or Richard Wagner, or {insert economist here}?

  12. motherhubbard'sdog

    Bruce of Newcastle
    #1636701, posted on March 23, 2015 at 12:38 pm

    A debt of 60% (of GDP) means $1 trillion Australian. Approximately half of that is government: federal, state and local.

    Abbott is talking only about Commonwealth debt. Total net foreign debt is about 55% of GDP already. See http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1415/Quick_Guides/AustForeignDebt

  13. Pyrmonter

    Sinc, you should brush off Buchanan – a slayer of frequently repeated myths in this area

  14. Sinclair Davidson

    Yes – I was thinking of posting a 1967 paper he wrote with Wagner on public debt.

  15. J.H.

    “All borrowing is future taxation.”

    That should have probably been written as “All Government borrowing is future taxation”

    Just to make it clearer. One can never be too clear on that point….. 😉

  16. rebel with cause

    As Buchanan put it in Public Principles of Public Debt: The real “price” for the use of money now is the money which must be given up in the future.”

  17. I Am the Walras, Equilibrate and Price Take

    Sinclair Davidson
    #1636855, posted on March 23, 2015 at 3:51 pm
    Yes – I was thinking of posting a 1967 paper he wrote with Wagner on public debt.

    Please do. Given that Abbott appears, from his comments, to have given up on the fight to return the budget to surplus, such a post would be v. timely.

  18. Sydney Boy

    The problem with discussing government debt as a percentage iof GDP is that the average voter or “man in the street” has no idea what GDP is. How about we discuss government debt as a percentage of government revenue. Then people may be shocked to learn just how much the government has borrowed and how much it is paying back in interest.

    On another completely different note, why is it that the ALP are so good at coming up with emotive rhetoric and the Liberals are so hopeless? The Liberals cannot make a simple statement without Bill Shorten fitting “unfair budget”, “$100,00 degrees” and “rich mates” into every sound-bite. Surely the Liberals can hit back with something similar? They need to understand that the average punter has almost zero economic knowledge and only hears that the government is talking “their” money and giving it to the “rich people” who allegedly pay no tax.

  19. Squirrel

    Given that much, if not all, of the money borrowed by Australian governments will be coming from overseas, there is the delicate question of what foreign income will be available to us in future decades to repay that money.

    With so much of our foreign income derived from selling off finite natural resources, which are typically priced in buyers’ markets, that is a very big question – and far more important than a few percentage points difference in the interest rate which might be paid from time to time.

  20. Tel

    Inflation is taxation by stealth

    A lot of people say taxation is theft, but this is completely wrong. Taxation is robbery under arms. Taxation is a simple deal: hand it over your money or your life, all upfront and honest like.

    Now inflation, that is theft.

  21. How about we discuss government debt as a percentage of government revenue. Then people may be shocked to learn just how much the government has borrowed and how much it is paying back in interest.

    Sydnet Boy, we could also add the amount of interest that is going back to debbil debbil Financiers and Bankers. Then ask why it is that Liberal governments try to balance budgets so the debbil debbil Financiers and Bankers get bugger all from the taxpayers. Then ask why Labor gives the debbil debbil Financiers and Bankers tens of Billions of our hard earned each time they get in.
    Take the fight back to the Left. Make them own their actions.

  22. Bean Counter

    Winston Smith (11.46am). The ALP raises borrowings for others to repay for exactly the same reason that every other financial intermediary does. Why do mortgage and business brokers; electrical and furniture retailers; car dealers etc etc organize loans for others to repay?

    There was some jerk on the Cat recently who claimed that politicians; predominantly leftist politicians; were far too decent and honest than to allow a financial institution based overseas to set up a discrete account for them and their mates…..and to then deposit up-front commissions, then trailing commissions……for decades to come.

    Yeah. No way that people sending hundreds of billions in interest income (over time) to a Chinese or Swiss or Arab bank would want a little of that bonanza falling into their pockets too.

    No. Wucking. Fay.

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