Budget 2017: Good debt/bad debt distracts from lack of budget repair
Published by the Australian Financial Review, Monday 8 May
A Treasurer in a search of a budget centrepiece is a dangerous beast. After his wise tactical retreat on housing affordability, Scott Morrison was left with a void. He seems to have landed on a narrative of nation-building infrastructure through “good debt”, and budget repair by reducing “bad debt”.
At the wonky end, this is just about accounting. But more importantly, the rhetoric probably signals increased infrastructure spending and perhaps some spending cuts to reduce deficits.
The problem is that these loaded terms may hide more than they illuminate.
“Good debt” seems to mean borrowing more to invest in energy and transport infrastructure. It appeals to the intuition that if a future generation will benefit from an investment, then it’s fair they should pay some of the cost of that investment.
But the rhetoric conflates “good debt” and “good spending”. Infrastructure spending is only good if the benefits are higher than the cost of interest and paying off the infrastructure over its working life. The history of government infrastructure investment doesn’t always inspire confidence. Grattan Institute’s 2016 report Roads to riches exposed the truth: over a decade, too much public money has been spent on the wrong projects in the wrong places. Governments have spent more in swing electorates and funded roads that are not very important to the economy but are popular with local voters. Taxpayers are entitled to ask whether the next round of nation-building will be any different.
The “good debt” rhetoric suggests we may see new money for the Badgerys Creek airport, Melbourne to Brisbane inland rail, and Snowy 2.0. But even where these have an elephant stamp from Infrastructure Australia for a positive business case, we have to be careful. Projects in Australia – as elsewhere – have a tendency to cost overruns. Once these are factored in, line-ball projects such as Inland Rail may emerge as poor investments.
And cost overruns are a real danger given how much infrastructure is already underway. The infrastructure pipeline has filled over the last year or two with big and expensive projects such as Melbourne Metro and the West Gate Tunnel in Melbourne and WestConnex and Paramatta Light Rail in Sydney. Because infrastructure spending has already increased so quickly, there are emerging skills shortages and limited competition for contracts, which may push up costs.
Similarly, the rhetoric also conflates “bad debt” and “bad spending”.
Bad debt, good spending
Of course, government should cut spending on programs that are wasteful or poorly targeted. Pharmaceutical benefits, medical testing, industry assistance, and age pension welfare targeting are all areas where targeted cuts could produce budget savings without too many downsides. The government has announced significant school and higher education funding reforms in the last week that will limit increases in future spending, and target spending more carefully to those who need it most. Don’t be surprised if the budget also tightens pharmaceutical benefits to contribute to the costs of lifting the Medicare rebate freeze.
But you would be forgiven for thinking that the “bad debt” label meant that every dollar spent on welfare, education, or health was inherently wasteful. And it is way too simplistic to suggest spending money on people is bad but spending money on projects is good.
Mr Morrison is broadly right that government spending shouldn’t exceed government revenues for too long. As he puts it, “putting your everyday expenses on the credit card is not a good idea”. Both major parties maintain a commitment to balancing the budget over the economic cycle.
In fact, “bad debt” can be reduced both by reducing bad spending and by raising more revenue. Both the politics of budget repair and the sheer size of the budget gap mean governments are unlikely to be able to restore budgets to balance without some boost to revenues. Yet the revenue option is conspicuously absent from the government’s bad-debt rhetoric.
Tough choices needed
Avoiding bad debt ultimately involves making hard choices. Inevitably budgets only balance if we make hard choices to give up things worth having, including lower taxes, and better health services, education, welfare – and infrastructure.
The biggest danger is that “good and bad debt” may ultimately just be rhetoric that distracts us from noticing that nothing much has changed, even though there are real budget problems.
Chances are, this year’s budget will predict “bad debt” reducing to close to zero over the next four years, with a happy return to surplus by the end of the forward estimates. If so, it will be like the last eight budgets. And if so, it will also gloss over the numbers showing that revenue increases are the centrepiece of budget repair, with income tax and corporate tax collections projected to increase as a share of the economy.
The budget speech is particularly unlikely to dwell on how similar predictions in the last eight budgets have all been disappointed, with deficits – or “bad debt” in newspeak – remaining stubbornly at 2 to 3 per cent of GDP. There’s little pre-budget chatter about re-presenting the numbers to highlight good and bad forecasting.
No doubt the Treasurer will have more to say about good and bad debt on budget night. But when he does so, voters should keep an eye on the more important question: does the budget contain good or bad policy?