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.