Home World Business Why it’s silly to debate ‘good’ versus ‘bad’ debt

Why it’s silly to debate ‘good’ versus ‘bad’ debt


The Treasurer, Scott Morrison, strayed into some rather silly territory this week in a speech seeking to lay down a new set of markers for the budget, divvying up government debt into “good” and “bad” debt.

In a small way, it’s nice to have a concession – at last – that government debt is not always “bad”.

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But the idea of distinguishing between “good” debt and “bad” debt is silly for several reasons, the primary one being that it’s impossible.

If you think for even a moment about how taxes are collected and spent in this country, it’s immediately apparent that all taxes get poured into the same bucket, from which they are spend on different things.

No taxpayer is given the option, when filling out their tax return, to assign a particular dollar of tax to a particular purpose, be it welfare to support fellow Australians or building railways.

It all goes into the same pot.

Not for slicing

To the extent that the government falls short each year – that is, revenue is insufficient to meet outgoing expenditure – it must borrow to make up the difference.

It does this by issuing bonds – taking money from investors on the promised it will be paid back, with interest.

Treasurer Scott Morrison. Treasurer Scott Morrison. Photo: Cameron Spencer

It’s impossible to say whether a bond issued on any given day is going to fund “good” infrastructure spending or “bad” welfare spending.

Debt’s just debt, no matter how you slice it.

There's no such thing as 'good' debt and 'bad' debt. There’s no such thing as ‘good’ debt and ‘bad’ debt. 

It would all make more sense if Morrison were simply distinguishing between good and bad government spending, which one suspects is his true intent.

But even here we discover more flaws in the Morrisonian logic.

More worryingly Morrison seems to not grasp the basic economics of the impact of fiscal policy

Productivity key

In reality, whether infrastructure spending is good or bad depends entirely on whether it’s spent on productivity-enhancing investments, like a much-needed railway which relieves congestion on roads, or wasted on pork barrelling in marginal electorates.

Similarly, spending on education can be either good or bad, depending on whether it goes on things that genuinely enhance learning outcomes, or things that don’t, like reducing class sizes beyond a certain point. 

Illustration: Glenn Le Lievre. Illustration: Glenn Le Lievre. 

More worryingly, however, Morrison seems to not grasp the basic economics of the impact of fiscal policy – the taxing and spending decisions of government – on the economy.

In a press conference following his speech, he claimed money spent on infrastructure is “good” because it boosts productivity, and hence, jobs and growth.

Money spent on other things, like welfare, we are left to assume, is bad because it does not have the same productivity benefits.

Social benefits

First, this isn’t true either. Many areas of recurrent government spending, particularly on health and education, can also be classed as productivity-enhancing – increasing the ability to produce more output from a given set of inputs.

For example, money spent on preventative healthcare increases a worker’s ability to work in the future. Money spent on a child’s education increases their future earning capacity and productivity as a worker.

Similarly, if job support welfare genuinely assists an unemployed person to keep paying their rent and supports them to find another job quickly, that welfare also helps to protect the productivity of that worker, by helping them avoid a period of skills-destroying prolonged joblessness.

But even if money spent on welfare does not achieve this purpose – even if it just goes into the pocket of someone who doesn’t need it – it’s still wrong to say that such spending does nothing for jobs and growth.

In reality, all government spending adds to demand in the economy, and thus supports jobs and growth. Every extra dollar in a person’s pocket is an extra dollar they have to spend at the shops, supporting jobs in retail.

Indeed, government spending can be a very useful way to help support jobs and offset a contraction in private demand during times of recession.

Stabilisers needed

Even without a purpose-designed stimulus package, government policy settings help to support demand in the economy during recessions. This is called the budget’s “automatic stabilisers”, which is the tendency for tax collections to fall (because more people lose their jobs and company profits fall) and spending to rise (on jobless support) during recessions. Budget deficits are to be expected during a recession.

The flipside is also true.

During good economic times, the automatic stabilisers work to return the budget to surplus. More people get jobs and company profits rise, leading to higher taxes being collected. Money spent supporting unemployed people falls.

The resulting budget surpluses should then be used to pay off debts accumulated during the bad times, resulting in shrinking government debts.

Arguably, this is where we should be now.

In the aftermath of the global financial crisis, the world has entered a new period of lower growth for longer, meaning it has taken longer for budgets to return to good health.

But it’s far from clear if Australia’s budget should still be in deficit for cyclical reasons.

Sure, growth is lower. But it may be lower for some time to come.

It is reasonable to ask: if not a surplus now, then when?

It’s increasingly clear that Australians are just not paying enough tax to cover our spending commitments.

That could be because spending is too high, or that taxes are too low. Likely it’s some combination of both.

The public conversation that is desperately needed today is about how to ensure taxes are raised in the most efficient manner possible to fund spending on policies that genuinely enhance the wellbeing of the Australian community.

Morrison’s simplistic characterisation of “good” versus “bad” debt progresses us very little down that path.

Ross Gittins is on leave.


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