2 May 2017
By Stephen Koukoulas
Treasurer Scott Morrison is in trouble. Or at least his budget is.
As Morrison sat down to frame his second budget and the fourth of the current Coalition government, Treasury presented him with an economic triple whammy on the outlook: a wider budget deficit, sluggish economic growth and many years ahead where unemployment will be stuck at a relatively high 5.25-5.75%.
This is an outlook that requires a policy response. To his credit, Morrison is set to increase infrastructure spending to not only boost growth but to add to productivity. As Labor did during the global crisis, Morrison knows he needs to deliver some fiscal stimulus to move the economy out of its low inflation/high unemployment funk.
The problem politically is that this means an already wide budget deficit and rising level of government debt will need to be expanded. This is anathema to the Coalition and will reinforce the rank hypocrisy of its political strategy over the past decade of maligning budget deficits and rising government debt regardless of the state of the business cycle and level of unemployment and what that debt is being used for.
The budget papers, next week, will show net government debt as a share of GDP on track to reach the highest level since the aftermath of World War II.
Faced with this political embarrassment on the economy and rapidly growing debt, Morrison has chosen to trot out a new slogan. Morrison is covering the government’s economic and fiscal challenges by seeking to distinguish between “good” and “bad” government debt.
It is clear that the slogan is cover for what will be a blowout in the budget bottom line.
Attempts to distinguish between good and bad debt add nothing to the analysis of economic policy. If the government wants to ramp up infrastructure spending, it can do so without the good-debt-bad-debt slogan. Just do it and be praised for taking action to add to growth and productivity.
If bad government spending requires funding with bad debt, stop doing it.
Morrison has suggested that welfare spending and Medicare costs are funded with bad government debt. This reflects poor economic knowledge on Morrison’s part given the near unanimity in academic studies that show how greater public funding of health leads to higher workforce participation, lower absenteeism, higher productivity and stronger economic growth. It is clearly good for the economy to have a fit and healthy workforce.
The other major problem with the juvenile bad-and-good-debt slogan is that tax receipts and therefore government borrowing are not hypothecated. And in all but rare cases, they cannot be hypothecated. Roads are not funded by petrol tax. Defence and pension spending are not explicitly funded by income tax. Company tax receipts do not fund infrastructure spending.
Is the $167 billion social security and welfare cost in 2017-18 completely unfunded? Every dollar of it, as Morrison says? Or is the $210 billion in individual income tax payments, when overlaid against welfare payments, pointing to the welfare system running at a surplus?
There is no value in this types of analysis.
There is a further problem with Morrison’s slogan and strategy. Debt in fungible. What, for example, will the $1.7 billion government borrowing in the bond market this week be used to fund?
No one, not even Treasurer Morrison, can say.
This reinforces the impossibility of determining which areas of the government are funded by debt and which, in the Treasurer’s rhetoric, pay for themselves — good or bad.
As noted earlier, if there is bad government spending that leads to debt, the budget should announce the end of those wasteful schemes. Immediately. If there are good projects that Australia needs that are costly, the government should borrow money to do them.
Good and bad debt are concepts riddled with as many difficulties and complexities as John Hewson’s GST birthday cake in 1993.
Morrison runs the risk of falling into a similar trap when he is asked what is good or bad debt.
The politics could and should be brutal.
It will be tough for Morrison to visit a hospital in his electorate around the Shire and tell a cancer patient that the Medicare cost of their treatment and hospitalisation is being funded by bad government debt. Or when he sees a parent taking their sick child to a bulk-billing general practitioner who then prescribed a drug subsided under the pharmaceutical scheme that this cost to the government is bad.
How are age pensioners going to react when they are told the funding of their age pension is provided through bad debt.
The good debt, bad debt slogan is cover for the need for a wider budget deficit which is nothing to be ashamed of. If the government needs to borrow money to support jobs and growth, it should. No slogans will change this fundamental requirement of good economic management.
The credit-rating agencies have already indicated that they will not fall for the definitional flourish that will be in the budget. They will look at the overall standing of the budget — and good, bad and mediocre debt — to determine whether or not the triple-A credit rating will be retained.